I don’t want to do the math but I do math so here it goes; the S&P 500 is down nearly 15% so far this month. Even something as simple as the Vanguard Wellesley fund, cited as having conservative allocation strategy, with a 0.35 beta and just 37.3% in equities is down nearly 9%. Talk about a lump of coal in one’s stocking to say nothing of one’s throat.
Where does blame lie?
Everyone points fingers and the use of the plural there is
relevant. It was the trade stress,
Brexit, the Fed, slowing economies in China and Europe, softer auto sales and a
rough housing market, the post sugar-high of the recent tax breaks, turmoil in
Washington, especially in the White House.
If there is confusion it comes from the ADHD nature of media coverage I
think. The market’s move on a given day
results in a specific headline; it’s a tweet, it’s a vote, it’s one
institution’s change in call, it’s a central bank doing what they’ve been
saying they’d do all along.
Surely they all come into play after a long, if disappointing, 10-year recovery,
and just as surely, perhaps more so, is the visceral sense that stocks can only
go up for so long. My point there comes
from ‘institutional memory.’ By that I
mean that we all recognize that the equity market, and the economy as proxy,
were closer to the end of a cycle than the start this year. It reminds me of 1999 and the tech bubble;
people realized things had gotten extreme, but the human element of greed kept
us in longer than logic.
Then, like today, once someone sold, then someone else sold,
then someone else, then me. And so it’s
goes.
I think today’s weakness has legs.
First, per the second paragraph, there are many ongoing factors to
cite. Second, as is generally the case,
the flattening Treasury yield curve has been the best, in my opinion, indicator
of a recession to come with something on the order of an 80% track record. Third, leaving aside Trump’s base – call it
35% of the population – the majority of the country must have sensed the stock
market was on borrowed time. Without
judging the ultimate merits of the actions, with deregulation done, the tax
cuts and the deficit boosting stimulus accompanying it proving of only
temporary impact, Trump’s got little left to offer.
Strike that. He’s got nothing left to offer. That leaves him with the, pardon the visual, naked exposure to the weak elements of his Administration, perhaps dangerous ones. The markets, like many in the GOP leadership, were saying ‘we may not care for the man, but we’re getting a lot of what we want.’ There is nothing left to get on the economic/market front except for a still higher a Federal deficit if we are indeed entering the end of the growth cycle.
I once again need to point to some personal longevity in all this. I started writing about bonds in early 1987 and so offer perspective. That is to say, market prices are a bloody good prognosticator of things to come – the curve, equity prices, credit spreads, oil; the whole lot. It goes with the basic tenet of technical analysis; market prices discount all the known information. And what said prices are telling us is that the economy is headed towards trouble, i.e. recession. Stocks alone don’t predict that. Rather you have to take it in along with all the other price shifts taking place.
As much as we’re surprised by the speed and magnitude of what’s taking place in stocks, we probably spent much of the first two quarters wondering when we should book profits as opposed to buy more. Come now, it was greed. It always is.
As much as the plunge in the stock market discounts the bad new it anticipates, history suggests that there’s more to come or, at least, that this is not a buying opportunity in the broad sense. That is to stay if we are going towards a recession, the soft price action can last for several quarters and, historically, the initial dip comes in advance of an actual negative quarter.
Let me add another perspective. If the equity market has some more trouble ahead, think about the aging population. Someone born in, say, 1958 was a mere 42 at the time of the NASDAQ bubble and so had a long runway to retirement. Said person was 50, the new 40, into the Great Financial Crisis, probably with kids around college age, but still had some years to go and make up for losses incurred in that event. Now, said person is 60. The runway to retirement is significantly shorter which suggest the willingness to stick out a bear market is less. Even if the next recession proves shallow, I believe you will find older investors, who also own the most equity shares of any demographic cohort, will opt for more risk aversion in the decade to come.
