Dear Mr. Market:
Yesterday seemed like the start of the Great Depression for some pundits and nervous nellies. Fear sells, and negative prognosis appears smarter than positive outlooks for whatever reason. The reality, and key reminder we wish to bring up again, is that the long awaited correction has yet to come. As of this writing, we are literally only -3.91% off of all-time S&P 500 highs in the market.
It should be noted that AAII Bearish Sentiment reading is as high as its been since the last most major S&P 500 sell-off.
While emotions and fear levels are running high, proper perspective needs to take center stage. Today we share such from Brian Rich who is a long-time Forbes magazine contributor and the founder of the Billionaire’s Portfolio. What follows, in our opinion, is a timely and solid assessment of yesterday’s action as well as what’s on tap for the near future:
| We head into a big Fed meeting this week. And to start the week, global stocks sold off across the board. So did commodities. The “risk” focused on today by the media was Evergrande, the real estate giant in China that is effectively in default. We discussed this Evergrande risk last week — with $305 billion in liabilities there is speculation that it could melt the financial system in China (like a Lehman moment). However, this “free market” type of outcome is very unlikely. China is in a position of strength globally, coming out the pandemic, and the Chinese Communist Party is nationalizing parts of the economy (taking more control). Intervening and controlling outcomes is what they do. We should expect the government to manufacture whatever type of outcome it wants. That said, if we look at the markets for clues today, about the perception of systemic risk in the world, the first place to look is the U.S. bond market (the safe haven for global capital in times of risk). While yields moved lower today, the move was relatively muted (down 5 basis points), holding and closing above 1.30. This should tell us that investors around the world did not panic today. And it may tell us that the bigger issue for stocks, at the moment, is the change in policy direction that the Fed is due to make on Wednesday. As we’ve discussed, the Fed has laid the groundwork to announce a plan to taper the QE program. But as we’ve also discussed, monetary policy will remain extremely accommodative for a quite some time, even after they begin to raise rates (which will be at least six months away). Meanwhile, the stimulus from the fiscal side is only getting more extreme. This combination will continue to fuel stock prices through (at least) much of next year. In the meantime, we’re getting a 5% decline in the broader market, which will be a dip to buy. Let’s take a look at the chart … |
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| As you can see stocks broke this big uptrend from election day. That election day trend was fueled by the expectations of continued easy money and an unimaginably big fiscal spend. We now have a technical break, and a 5% decline. A slide down to the 200-day moving average would represent a 10% correction. This type of move could happen, and happen quick. But in a world of awash with liquidity and intervention, the history of the past thirteen years shows us that the recoveries can be just as fast. It’s a dip to buy. |
