Taking a bit of poetic license, I would like to recount a fictitious finance dinner I had with two native New Yorkers, Fed chief Janet Yellen and Treasury Secretary Jack Lew on Sept. 30, 2014, after the close of markets.
Let's set the table. After libations and feasting on New York strip steaks, we got around to talking about the economy and what certain market levels/prices would indicate.
At the end of September, the Dow stood at 17,042, the 10-year Treasury at 2.508 percent and the 30-year Treasury at 3.211 percent.
We began with the easiest of questions — stocks.
Would it be economically meaningful if the Dow sold off more than 1,000 points over the next two weeks, along with commensurate sell-offs in all the other indexes?
The markets can and will correct over time — sometimes for good reason and sometimes not — but a correction would not likely represent anything major economically, they intimated.
What about a 1,000-point rally over two weeks?
That, they felt, would be a validation of their economic plans.
The Dow Jones fell below 16,000 and got down as low as 15,850 on Oct. 15.
Next up were bonds. When I asked if either thought it would be meaningful if the 10-year fell below 2 percent in just 14 days, we got a different sort of response: raised eyebrows and a couple of sips of Cabernet.
Then Jack said, "I really don't think that is very likely, a very low-probability event, but in the very unlikely case that it did occur, it would probably signify a major event, like Russia invading another country or an ISIS attack on American interests."
Janet didn't think breaking 2 percent was in the cards, either.
Well, you guessed it. The 10-year got down to 1.873 percent on Oct. 15.
And the 30-year note broke 3 percent, plummeting in yield to as low as 2.812 percent.
Over dessert, I asked what if each of these outsized events happened at the same time? Silence.
Well, unfortunately, they all did happen at once.
While the conversation was fictional, the data are unfortunately real, making for a real Red October.
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