“We are in a bear market.”
Here Morgan Stanley strategist Michael Wilson dumps ice water on Wall Street’s head.
His claim is as arresting as the shriek of “Fire!” in a packed playhouse… the sight of a naked woman in Sunday church… or a MAGA hat on Hillary’s head.
Has it finally come to pass after lo so many years? Are stocks sunk in a bear market?
Today we interrogate this scandalous claim.
“If it looks like a bear and trades like a bear,” advises Wilson, “stop trading it like a bull.”
It is true, the market presents all outward appearances of a bear… and is trading like a bear.
The market opened this morning as it ended yesterday… looking and trading like a bear.
And that is precisely how it ended the day— only more so.
The Dow Jones took another slating today, down 552 scarlet points. For the second consecutive day it has plunged triple digits.
The S&P and Nasdaq put in equally miserable pairs of days.
Each of the three major indexes are now negative for the year.
Over 40% of stocks on the S&P trade officially in bear territory — down at least 20% from previous highs.
And the darlings of the Nasdaq?
The “FAANG” stocks — Facebook, Amazon, Apple, Netflix, Alphabet (Google, basically) — have hemorrhaged a combined $952 billion since October.
In all directions, horror succeeds horror.
Deutsche Bank claims 89% of all asset classes it tracks are negative on the year — making 2018 the worst year since 1901.
But is it the end of the bull market?
Michael Arone is chief investment strategist at State Street Global Advisors.
He cites four factors that will bring down the curtain:
- Higher rates underpinned by the Federal Reserve’s normalization path
- Expectations for slowing earnings after a healthy run of quarterly results in American corporations
- A longer-than-hoped-for trade dispute on tariffs between China and the U.S.
- And the lessening of the positive effects [from] fiscal stimulus.
Let us tackle these bearish factors, seriatim…
1) The Federal Reserve is committed to raising interest rates. Recent comments by Jerome Powell give no suggestion to the contrary.
We have previously pled the case that a December rate hike could lift the fed funds rate above the “neutral rate of interest.”
The record indicates trouble is usually on top six–12 months after the line is crossed (go here for more).
2) Corporations have likely attained “peak earnings.”
This year’s tax cuts lifted them to their present perch. But the updraft is fading as tax cuts run their course.
As explains Tom Essaye, president of the Sevens Report:
The market knows that earnings growth has peaked, and so earnings growth can’t be a reason any longer to ignore the macro picture.
No fresh tax cuts are in prospect… we may add.
3) A longer-than-hoped-for trade dispute on tariffs between China and the U.S.?
We can locate no compelling reason why trade disputes will soon end.
Recent comments from Trump henchman Mike Pence offer little reassurance:
“The United States… will not change course until China changes its ways.”
4) It appears fiscal stimulus may be short of steam.
Second-quarter GDP growth came in at 4.2%. Third-quarter growth slipped to 3.5%.
Now a Reuters poll of economists suggests fourth-quarter GDP will expand at 2.7%.
Even the eternally smiling Atlanta Fed puts it lower — 2.5%.
Meantime, the overall Fed projects long-term growth of under 2%.
Do we here present the case for a bear market?
Each factor cited has its points — combined they form a case of solid oak. If markets avoid one pitfall, two more rise in its place.
A drunk stumbles into a minefield. Soon or late he will take the fatal step.
Is it different?
But if a bear market is upon us — or will soon fall upon us — perhaps we need look no further than central bank liquidity…
Last year central banks offered up a $2 trillion increase in liquidity. But the stream is slowing to a trickle.
For the first time since 2008, central bank liquidity additions are heading to zero.
Next year they are on pace to cease altogether… and flow backward.
Some analysts project an $800 billion global liquidity drain next year.
“All this taken together,” says analyst Adam Taggart of Peak Prosperity, “means that the era of amassing financial wealth from swiftly rising capital gains is over.”
“Over,” he says.
But the aforesaid Michael Arone is not convinced the end has arrived — yet:
“You can’t hear the fat lady singing just yet, but if you listen closely, you can hear her warming up in the background.”
We hear her fine enough… and she grows louder by the day.
Managing editor, The Daily Reckoning