Friday, September 4, 2015

It Could Take As Much as Four Months for the Market to Recover

I read that and thought, "Bwahahahahahahahahahahahahahaha".

I came across a link to this CNBC interview (H/T Bonner and Partners), which says that headline according to Wells Fargo's Brian Jacobsen, Wells Fargo Advantage Funds chief portfolio strategist.
"I do hope that it is a two to three week bottoming pattern. However, when I look at the history of bull market corrections, it actually suggests that it might take a little bit longer than two to three weeks," Jacobsen told CNBC's "Squawk on the Street."
For the record, I believe that pessimists are wrong just as often as optimists.  If everywhere you look you see bad news and no future besides "wailing and gnashing of teeth", you're probably overlooking something.  On the other hand, I think we have a lot of market distortion to crank out of the system and a lot of things to be reckoned with before we're over the worst of the economic turmoil.

Let's just go with the evidence we see in front of us.  At today's close of 16,102, the DJIA has lost about 12% from its May peak of 18,312.  I think it's too early to tell if this sell off is over.  It's definitely a correction but which way are going to move?  Indicators like the VIX (volatility index - essentially moves opposite the market; it's up when the market is down) are showing improvement but have still not approached levels they had before the selloffs started.  This indicates we have some more shocks to go through.

The correction has been going for two weeks already, so it's reasonable to ask if it's just a correction or if it's something more concerning, like the start of a new bear market.  It's just too soon to tell.  Bonner has a partner, Richard Duncan (who runs an expensive newsletter) who believes we're just at the start of a five year bear market until 2020.  That would mean the global credit bubble is deflating, and the world is “sliding back into a severe recession.”  For what it's worth, I've written more than one time on a confluence of things that I thought indicated the economy was going to slow down in the early 21st century regardless of attempts to prevent that.

The entire effort of the Federal Reserve since 2008 has been to head off a bear market.  The Fed has propped up stock prices to where they peaked (in May), and they will pull out even more stops to try to keep a long term bull market from happening.  They will intervene so hard that there's every chance that they'll cause a collapse.  If the trillions they've spent so far can't hold it off, how many more trillions would they have to throw at the market? 
(source)  There were two major corrections since 2009. In each case, stocks recovered all their losses within about four months.

But if you look carefully, you see that this was hardly a case of natural market forces at work. Instead, the fixers from the Fed were on the job.

In both instances, the Fed announced new liquidity programs near the bottom of the corrections. Stocks headed up again soon after.
Furthermore, a sign that investors are pessimistic would be bond prices going up (due to more demand) which means yields will be going down.  As has been going on since July.
I don't think any real direction will be discernible for several weeks.  Today's underwhelming job report will probably ensure the Fed will not raise interest rates.  That will add in.  Conventional wisdom is that raising rates will hurt the economy, and it's a pretty simple idea.  It would, however, send the message that the Federal Reserve has concerns about the extent to which they're distorting and damaging the economy, and that message might encourage buyers that there are adults in charge. 

Safe haven investments, like those 10 year bonds plotted above or, yes, solid commodities, are the place to be.  This capital management firm, for example, got completely out of equities and into cash.


  1. I was at my Credit Union today adding another check to my 401(k).

    They asked me if I'd like to talk to somebody about changing my investment options for something with a higher yield, and that CD's were "up to 1% now!", at which point I had to control an urge to start laughing.

  2. I'm hearing a few talking heads on Fox Business News trying to talk this 16k as the new floor with things moving back up again. I just roll my eyes.

    To FBN's credit I've also started hearing several mention a deflationary depression which I think is at least more intellectually honest.

  3. Some of what is said is for sheeple consumption. After all you can't tell the truth or talk trash about the market if the market is your business. Interestingly my three grandchildren (4, 6 & 9) are here today as I post this. We are going to the fair this afternoon but I can't tell them that. They are quietly watching Avatar on TV and I can waste my life on the internet in peace. If I tell them what is about to happen excitement breaks out and no one gets anything done. So take what you hear with a grain of salt. All that you hear is not malicious or propaganda, some of it is well intended and perhaps wishful thinking. Look on the bright side; Avatar is keeping them quiet and I have time to think. The same is true of the stock market situation. Let the politicians and MSM soothe the savage beast while you prepare for the worst.

  4. I would be surprised if it took 5 years to get back where we were - but I would also be surprised if it only took 4 months. I think we are in for a bigger drop over time; I can easily see a correction of 25 to 35% coming. As you stated, much of the market growth since 2008 has been because of money injections by the Fed or other moves to prop up the market, both by the Federal Reserve and by the Federal Government.
    I would not be surprised to see the markets remain volatile until and through the 2016 election; if a Republican is elected who gives confidence to the economy, then I see things changing - if not, then I think we'll be in for a long time of at best sideways movement and at worse something as bad as 2008 - 2009.