Investors will start to realize the economy is not recovering in August, I said. As result, the stock market will break sometime in August or September, I said. It will likely experience an even bigger plunge as an October surprise, I said, because something about October loves a Halloweenish surprise for stocks.
The bull gets ripped to shreds
The post-COVID market put in its last peak right as we shifted from August into September. September was recognized as a generally bad month for stocks. Stocks took another plunge in October, diving almost 2,000 points on the Dow in the final week, making October an even worse month for stocks than September was. Two months in a row of back-to-back declines.
While October’s surprise did not run as deep or surprising as I was thinking we’d see, it nevertheless was enough to break a few records.
Zero Hedge referred to it as “Shocktober,” claiming stocks had experienced their worst pre-election plunge in history. It was also their worst drop since the horrendous March 2020 crash where one had to look back to events like 1929 to find a crash that went deeper though not steeper.
September and October experienced week after week of drawdowns. The few good weeks in the mix were not enough to offset the much worse bad weeks.
Or as The Wall Street Journal put it,
The Dow Jones Industrial Average declined Friday, closing out its worst week and month since March in the final lap of the presidential race.
And March was as horrible as hell, itself, so saying it was the “worst since March” is like saying “it was my worst date since my night out with Freddie Krueger.”
The Journal noted that investors had been spooked by rising COVID cases and the failure of stimulus measures to make passage in congress and had begun to feel a little queasy about earnings and especially forward projections on earnings.
Yet, who couldn’t have seen that coming? Those were some of the black swans I and many others enumerated as being likely to light upon us at this time of year months ago. (“Black swans” in that many were blind to them by choice — unwilling to think about them.) The dim stock investors in their madness blithely ignored everything they didn’t want to hear. These things, I said, would eventually catch up to people in such deep denial. Reality would make itself known and crash the Halloween party like the Grim Reaper.
Bloomberg noted the worst performance for the final two weeks of October since the 10.9% crash in ’87.
Intraday on the final trading day of October, both the Dow and the Nasdaq had fallen into full correction, but each recovered just enough ground via a spike in the last minutes of trading to step back outside of that by day’s end. The Dow ended clinging by its teeth to its 200-day moving average and the S&P and Nasdaq ended panting on the support of their 100-day moving averages.
Speaking of teeth, the nearly indefatigable FAANG stocks were defanged for two months in a row, while volatility rose violently back to a dangerous high not seen since the death March of 2020, a month which shall live in infamy.
Greenlight Capital founder David Einhorn warned in his quarterly letter at the end of October that the top had come in for the U.S. stock market after an “enormous” bubble in technology stocks popped in September.
The S&P 500 index closed at a record 3,580.84 on Sept. 2, while the tech-heavy Nasdaq Composite posted an all-time closing high of 12,056.44. Stocks subsequently pulled back in September and a new round of COVID-19-related jitters were blamed for another downdraft that saw the S&P 500 erase its October gains early Wednesday.
Bubbles … tend to topple under their own weight as all investors finally hop in, short sellers cover, and the “last buyer has bought (or bought massive amounts of weekly calls),” he wrote.
That was the resurgent rush we saw for the top during the early months of summer when I said we would see stocks take a mad rocket-ride to the moon during the good news of reopening, which investors would take to be far more successful than it really was.
I pointed out before reopening began that recovery should not be weighed by how fast the economy went back up but by the point at which it stalled after a fast rise. The economy’s rapid lift, I said repeatedly, was one of the most certain economic events imaginable. What mattered would be where the rush ended, and I said that would start to become apparent for those who were paying attention by mid-July, with the dull market not taking notice until the end of August or September.
So, the early-summer melt-up happened, and then the bubble broke at the start of September with the worst to come in October. The market tried to restage in late September and early October, but the effort quickly failed under economic assault, resurgent COVID fears, and dying stimulus.
“The decline starts and the psychology shifts from greed to complacency to worry to panic,” Einhorn said.
Yes, it does, and that is where we sit right now — straddling the fence between worry and panic at the “40” threshold of the CBOE volatility index for stocks, which marks the changeling point between bad months and months like March.
Or, as Zero Hedge just put it,
Wall Street Braces For “Terrifying Risk” And A 20% Plunge In Just A Few Days
…With a likely unprecedented volume of mail-in ballots, prospects for volatility enduring post-election day have rarely been higher, and is in fact higher today than a month ago when concerns about post-election vol initially spiked….
According to Goldman’s David Kostin, the biggest concerns expressed by its clients is that a contested election could drag on, resulting in little clarity for weeks if not months….
Something wicked this way comes
Both sides have already staked out the battleground in these peculiar times by noting a rise in miscarriage by the US Postal Service, unusual congenital flaws in the designs of local ballots, election hocus pocus by paid ballot-box stuffers, and the list goes on. There will be plenty of ground to fight over and plenty of blood spilled upon it with no place comfortable for weary stock traders to tread, but traders have been too sanguine about these soon-to-be blood-soaked fields, anyhow:
Deutsche Bank strategist Parag Thatte wrote that the pricing of VIX futures with November and December expiries are likely too sanguine that there will be a quick and clear outcome of the elections…. If indeed the election won’t be resolved until mid-December (at the earliest), the kink [in the VIX] needs to move by at least 2 months, presenting a major arbitrage opportunity.
And major arbitrage means major market turmoil. Those who are prepared can profit off of it if they call it right. Those who are not prepared, take the losses, which will likely cut deep into their bones.
On Sept 14, JPM’s chief equity strategist Misla Matejka joined this chorus of warnings about a contested election result, which he saw as the “worst-case scenario” for the market
Matejka noted this as the top risk for the market from now to the end of the year, pointing out that, if the election is contested, the likelihood of getting a stimulus package passed, just as it becomes most essential, gets buried as the two major parties jockey in case they need — in their own perversely demented way of thinking — to make sure the opposition, should it “steal the election at the stroke of midnight, starts off 2021 as decapitated as possible, American public be damned!
While early October experienced a brief period of inexplicable optimism that the election would be resolved quickly and painlessly (bizarre because if Trump does lose, it’s amazing that anyone thinks he would leave quietly and without a SCOTUS fight) fears … that a contested outcome after the election is once again the base case … have stormed back to center stage….
That, as Bloomberg writes and as the market action today confirms, will “disappoint investors who’ve been counting on additional stimulus in the wake of the election, regardless of who wins, to help the economy recover from its coronavirus-induced malaise. It would also let down those betting a Democratic sweep of both the White House and Congress will release a torrent of government spending.”
So, hang on for a likely stormy November and downright bone-chilling December as now being the base case. The worst case as the new base case may not be the one that plays out, but it looks increasingly likely.
According to Daniel Ahn, BNP Paribas chief U.S. economist, there is a “terrifying risk” that an unresolved election could put investors in “completely uncharted territory.” Speaking to Bloomberg, Ahn said that “if there is a constitutional crisis, we believe that the loss of political credibility and standing of the United States as a stable country could threaten its status as a safe haven with unfathomable consequences for the economy and for markets…”
According to a Thursday note from Bank of America’s Michelle Meyer and Savita Subramanian, stocks could slide as much as 20% if there’s a contested election. This means that as soon as Wednesday once it emerges if the election will not have a clear winner, we could see a bear market….
Others are similarly concerned (and likely selling now when they can, not when they have to): Brian Gardner, chief political strategist at Stifel Nicolaus last week cautioned that markets may not be taking into account a closer-than-expected election and outlined a range of market reactions if what he referred to as “chaos” were to prevail in the wake of the Nov. 3 vote….
Wells Fargo analyst Mike Mayo chimed in too, warning that “markets may be in for a very choppy ride on Nov. 4 and possibly for much longer if it becomes clear that the election will be contested.”
Whistling past the graveyard
People can pretend they are not spooked, but this week’s deep plunge in stocks into the start of Halloween is a pretty solid indicator of the chill running up investors’ spines, especially when you consider the fact that this rattling of the exit doors happened in the same week when investors got a GDP growth report that was as savory as a roasting suckling pig with an apple in its mouth and pumpkin pie on the side.
That report was, of course, not all it was made out to be by Kudlow and Kompany — being something of an anomaly in its origins — but it was still better than the sugary candy this market has thrived on as its sole nutrition for months now. And, yet, the market fell … and fell hard. Even Trump’s economic advisor, Stephen Moore, was surprised at how the airy report landed with a thud on the White House doorstep:
Moore said he had hoped that the Gross Domestic Product report that came out on Thursday would have given the president’s campaign a boost. He even recalled visiting the White House last month, during which he told the president that the report was “going to be a real ‘October surprise,’” that he could “really play… up for the voters,” and that the two of them then brainstormed ways to aggressively promote the coming numbers.
But shortly after the positive-looking report came out on Thursday—showing that the economy grew at a 33.1 percent annual rate last quarter—Moore found it hard to muster optimism about the political benefits of it. “I really don’t have a good feeling about this,” he conceded.
The GDP hype by Team Trump appeared to do nothing for voters and very little for stocks.
The final week of October was made a bit more eery by the singular happenstance that saw both stocks and bonds going down in unison. Usually one arena going down levers the other one up. Not this time. As BofA’s Hans Mikkelsen wrote after Wednesday’s cliff dive,
What was truly unique about the Wednesday rout is that as stocks cratered, Treasury yields rose [meaning prices dropped] and gold dropped, or as he puts it “everything was on sale”, in other words, it was a perfect liquidation.
Such a selloff is so against the core tenets of conventional market flows, that this combination – of stocks, bonds and gold down on the same day – only happened twice in market history – on March 11 and March 18th [of 2020] – during the liquidity crisis where nearly all assets where liquidated as risk-parity funds were hammered.
Even technology stocks, thought in general to benefit from COVID, nose-dived.
So, investors in all arenas are a bit spooked right now, and a superheated election war, civil violence ensuing, and gridlock on a now direly needed stimulus package — if that all comes together as does not look too unlikely — could be a witches’ brew for stocks and bonds at the same time, making November a chill to remember.
Of course, the worst fears of all those quoted above need not be realized, but this is 2020, which has not failed to disappoint in the arena of trumped-up weirdness all year long!
For stock investors with money to play with it’s a chill time to be caught with your shorts down. Might be a good time to hike your market shorts up to your neckline and wear them like a tie. (Not advising anyone to take that risk, as shorting is always high-risk and because I don’t give market advice. Just sayin’ … something to consider.)
Feeding on Father Fed
The only savior the nation is looking to right now is Jerome Powell — co-architect of all the economic weirdness of the past decade. He will be sitting in a circle with his coven of banksters on the day after the election in committee deciding how to save America from whatever befalls it on Tuesday.
Now, if that doesn’t give you the chills …
Don’t count on much, though, because the Fed is the walking dead:
The central bank is running out of ways it can help….
While no Fed official ever would acknowledge that monetary policy ammunition is running low, and in fact would insist to the contrary, there appear to be few weapons left in the Fed arsenal.
“What they have left is really on the margin,” said Mark Zandi, chief economist at Moody’s Analytics. “They just don’t have much room to maneuver with regard to monetary policy. I don’t really see what more they can do. That’s why they’ve been so explicit in telling fiscal policymakers to do more, because they know they can’t help….”
The earnestness of the Fed’s requests for more fiscal aid are a reflection, then, of just how limited the central bank’s options are.
“There’s no game-changer here,” Zandi said. “There’s nothing big they can do to help the economy in the near term….”
Since everyone already pretty much expects the Fed to stay put for years, reiterating that stance provides little balm for when investors get nervous and the economy starts to wobble….
If we end Tuesday crossing realms into what looks to be the longest and most contentious election outcome in the nation’s history, investors will have to hope Powell packs a powerful punch if the market is going to rise above the fog of war. I don’t know what mysterious magic he and his coven can muster, but it will have to be some pretty good stuff because the masses appear to be ready for a good witch-hunt if it doesn’t work.
All I see coming in the dark months ahead is pitchforks and torches … and I haven’t been wrong in what I’ve seen for this year so far.