Bear markets and recessions, not a fatality – Weekly blog #735

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No absolute law governs markets + economies

The movement of time series of markets and economies is not controlled by scientific law, much to the chagrin of quantitative analysts and pundits. Statistically, minute by minute or day by day are both random and reactive to thoughts of swing factions. Since products and services have changed hands, there have been upward and downward price trends, although there is a fundamental difference between markets and economies.

Markets move on both real and supposed transactions, while economies move on the actions of participants and government forces. A key difference is that markets move with little regard for those who are not active, while economies try to entice non-participants to take a more active role. Market and economic/political pundits react to very current information, trying to get ahead of changes in direction. Most major moves of 10% or more are due to drastic shifts in confidence resulting from the recognition of long-term trends in imbalances.

Implications of the latest data

  1. While the bond yield curve is up for maturities up to 5 years, it is quite flat for periods from 5 to 30 years. (The bond market thinks inflation is an intermediate issue that will be resolved by the end of the next presidential term.)
  2. The most recent economic data presents a very mixed picture, as shown below:
  • Personal income +2.61%
  • Personal Savings Rate Change -65%
  • Residential investment -4.38%
  • Baltic Dry Cargo +3.27%
  • Inventory to sales ratio 0.79%
  • CPI +8.24%, PPI +15.68%
  • Broker call rate 0.95% versus 0.12% a year ago. (The cost of liquidity is rising, reacting to risk and availability.)
  • Both AAII metrics are extreme: bullish 19.8%, bearish 55.3% (the bearish was 59.4% on 04/28)
  • Productivity -0.6%, i.e. +7.2% in wage costs
  • Registrations for the 5th consecutive semester in college, -4.1% for all and 6.5% for blacks.

Stock market data

  1. Only 3 of 121 taxable equity-focused mutual fund peer groups were down for the week. The biggest drop was for the short-term average fund -5.97%. The other two declines were less than 1%. This is an extreme reading for the week, suggesting an extreme rally in a bear market.
  2. Stocks listed on the NYSE fare better than the growth-oriented NASDAQ: New High/New Low for the NYSE 88/36 and 49/113 for the NASDAQ. In terms of advances/declines in stocks traded for the week, the NYSE recorded more than 7x versus 4x for the NASDAQ. Indicative of an abandonment of the presumed growth and/more public participation in the rally.

Contrary concerns

Many brokers, advisers and portfolio managers have become much more cautious, led by clients worried about a recession this calendar year. (As the recent second Q1 GDP report confirmed a decline, bolstering the first report, that likely means two straight quarters of GDP declines are now in place for a recession.) While companies publicly maintain outlook Earnings bullish, shoppers and stores are signaling the first signs of cuts, both in spending and downgrading to more essential needs. Inventory is high relative to sales, which will likely be serially offset by discounts.

Some naysayers have been warning of a bear market/recession for over a year and appreciate their views moving from the margins to near center stage. However, if investors turn bearish and start selling before the “official” declaration of a bearish stock market or GDP-based recession, they will reduce the potential size of the downside and forfeit the opportunity to participate in a future major reversal. .

It’s a bit like the racetrack, where an early bettor spots a long bet that makes sense but sees just before tee time the odds of his pick dwindle due to increased participation from the “crowd of the race”. smart money”. As the long-term bettor is complemented by others who agree with their handicapping skills, winning payouts will be reduced by sharing their winnings with more people.

What are the imbalances that trigger a decline?

Since we never really know why people do anything, we have to rely on circumstantial evidence and accept that certain identified elements may have caused people to act in ways that contributed to the decline. Here are the imbalances that I perceive that may contribute to the decline:

For the economy

  1. In the end, all meltdowns are due to excessive leverage on too loose credit terms. From what is visible, the main culprit in the world this time is the work of politicians who are focused on the upcoming elections. Continued deficit spending leads to higher tax penalties, higher unemployment, and higher underemployment – ​​potentially leading to offshoring of jobs and opportunities.
  2. Various restrictions on trade to redeploy capital into the economy, both cross-border and within the country, are essentially a tax that will lead to more inflation.
  3. A school system producing students ill-equipped for today’s jobs and unable to be successful consumers, voters, parents and employees.
  4. Insufficient spending on national and international security in terms of military threats and other major threats.

Sotck exchange

  1. Traditionally, young people and other first-time investors lack the proper knowledge of investing, saving, legal requirements, or reading financial statements. We probably can’t stop them from making “easy” money in the fad or by the hour, but we do need to help them learn from their mistakes. One of the reasons young and new investors dominate various derivatives, crypto and trading techniques is that they are easy “brands” for sellers. More experienced investors know they don’t have the proper information to play these games.
  2. Due to low interest rates and regulation, the amount of capital devoted to generating trading liquidity has been significantly reduced. This is one of the reasons why we have such intense price movements.
  3. We also need to adapt to global investment, otherwise it will continue to leave our shores, leading to loss of capital and some of our best minds will leave to work and live in more attractive places.
  4. Due to our growing pension crisis, we should create vehicles that give favorable tax treatment to domestically generated dividends.

Barron’s had good market commentary for the week from Ann Richards, CEO of Fidelity International. She runs Fidelity’s ex-US business and has run several major UK investment firms. “I think there is a possibility, we could see the peak of the decline. But we are not there yet.”

Your thoughts?

I’d love to hear about other initiatives that might improve long-term investment prospects, both in the United States and around the world.

Original post

Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.