Lat week felt like a tipping point in the markets as more and more people are waking up to the reality that the bear market is real. As I wrote last week, we have passed through the first phase of a bear market were people just think things are in a correction and now are in the second phase, where people recognize reality. There are a lot of things happening and I want to just give you a few tidbits today. The first two quarters of US GDP were negative and historically that has been marked as a recession.
The real estate futures are projecting a bottom in real estate in the Fall of next year, so that’s probably when the bottom of the recession or slowdown will be. The stock market historically puts in a bear market bottom 3-6 months before the trough in a recession and I’m expecting gold to turn around and bottom before the stock market, in the December-February period most likely. The real estate futures are looking for a 9% decline from here, National real estate prices have already fallen almost 6% from their peak a few months ago. I’m not trying to predict exact prices bottoms to try to buy at, more just the general direction of things. I see no signs that the bear market is going to end this week or next month, but will likely end next year.
But this is more than just a bear market due to a recession. We have ended a financial order of low rates and Federal Reserve QE programs since 2009 that made the stock market go up and up. It is only just dawning on people that it may be ending to them. That’s why we heard so much senseless “pivot” predictions from so many market gurus this year that proved to be wrong. These same people were telling you last year that inflation was transitory and were wrong then too.
By keeping rates so low after 2008, and taking interest rates to zero in 2020, the Federal Reserve destroyed the bond market as a viable rational investment. It made no sense to buy bonds that yield nothing, but people did it thinking that bonds would keep going up in value as that is what bond funds were doing and even fewer Americans took the step of abandoning the 60/40 stocks/bonds allocation investment strategy even though the 2020 secular top in the bond market, with zero rates, would ruin it.
One reason why is that people lost sense of concepts such as the “time value of money.” New traders and investors even lost any notion of using investments in bonds in order to get interest. Instead they began to focus only on price action and listened to gurus who talked technobabble at them, telling them that they were in a new era.
“The Black Swan” author Nassim Taleb was on CNBC in a segment two weeks ago and did a good job trying to explain what I am trying to get at.
What this bear market actually represents is not simply a recession, but the end of the era of low rates, money supply expansions policies at the drop of the hat from the Federal Reserve, and the ease of speculation through pure price chasing.
One thing that happened last week that drives this point home is what happened in England. On Friday, the new Prime Minister of England announced that she was planning to cut taxes, much like Donald Trump did, and create aid programs for people to help them as their energy bills go up. It was a promise of economic stimulation and the British pound DUMPED on the news and so did the stock market in England. English bonds fell making their yields and rates go up!
After 2008 and up until this year, when a country would announce such a thing their stock market would go up and their bonds would rally.
Not anymore – now traders worry about debt and the inflation such measures could bring.
We are exiting a financial era this year.
The Japanese Yen is melting down and the Japanese bank announced an intervention to prop it up.
Such interventions almost always fail and are a sign of serious financial problems when a country does it.
If we are entering a new financial era, what does it mean?
When this bear market is over there will be a new bull market for stocks, but it is likely to be a cyclical bull market inside of a secular bear market, like the one that took place from 2000-2011 or in the 1970’s. After the market peaked in 2000, the S&P 500 didn’t make a new high until 2007. The stock market went sideways all throughout the 1970’s and concepts such as market timing became key for traders. Market timing will return. The idea of getting rich by getting into a meme stock, a crypto coin, will in time fade away.
People like Cathie Wood, and those who have mimicked her type of talk in the past two years, are financial dinosaurs.
Gold and silver, though, are likely to enter a secular bull market after this bear market cycle is over, as it did in the 1970’s and in the 2000’s, outperforming the stock market during those two decades.
Gold also is still outperforming the S&P 500 this year, even though it has been in decline the past few months.
You can see this from the GOLD/SPX relative strength ratio.
The sectors, stocks, markets, and asset classes that outperform the S&P 500 towards the end of a bear market tend to become the leaders of the next bull market. The job now is be cautious on doing anything for the time being, and use this time to identify and track the things that outperform the S&P 500 now for possible buys later when the time is right.
Last week I had a good conversation with David Skarica about the markets. In case you missed it, you can find it here.