Does anyone seriously believe that in the next global recession equity markets will not collapse? Do market participants really believe fiscal stimulus and helicopter money will save us from a gut-wrenching global bust that will make 2008 look like a picnic? Has the longest US economic cycle in history beguiled investors into soporific complacency? I hope not. – Albert Edwards, Market Strategist at Societe Generale
Friday’s 625 point plunge in the Dow capped off another volatile week. Three of the top 20 largest one-day point declines in the Dow have occurred during this month. Remarkably, the Dow has managed to hold the 200 dma 5 times in August. The SPX similarly has managed to hold an imaginary support line at 2,847, about 40 SPX points above the 200 dma. The Russell 2000 index looks like death warmed-over and it’s obvious that large funds are unloading their exposure to the riskier small-cap stocks.
The randomness of unforeseen events causing sudden market sell-offs is starting to occur with greater frequency. Friday’s sell-off was triggered by disappointment with Jerome Powell’s speech at Jackson Hole followed by an escalation of the trade war between China and Trump. Given the response of the stock market to the day’s news events, I’m certain no one was expecting a less than dovish speech by the Fed Head at J-Hole or the firing of trade war shots.
It’s laughable that the stock market soars and plunges based on whether or not the Fed will cut rates, and by how much, at its next meeting. At this point, only stocks and bonds will respond positively to the anticipation of more artificial Central Bank stimulus. And the positive response by stocks will be brief.
Morgan Stanley published a table of 21 key global and U.S. economic indices – ranging from the Market Global PMI manufacturing index to the Goldman Sachs US financial conditions index – and compared the current index levels to the same indices in September 2007. Every single economic index was worse now than back in late 2007. September 2007 was the first time the Fed cut rates after a cycle of rate hikes.
But there’s a problem just comparing a large sample of economic indices back then and now. By the time the Fed started to take rates down again in 2007, it had hiked the Fed funds rate 425 basis points from 1% to 5.25%. This time, of course, the Fed started at zero and managed to push the Fed funds rate up only 250 basis points to 2.5%. Not only is the economy in worse shape now than at the beginning of the prior financial crisis but the Fed funds rates is less than 50% as high as it was previously. For me this underscores that fact that everything is worse now than in 2007.
The commentary above is an excerpt from the latest issue of the Short Seller’s Journal. Each issue contains economic and market analysis short sell ideas based on fundamental analysis, including ideas for using puts and calls to express a short view. You can learn more about this newsletter here: Short Seller’s Journal Information.