As the US dollar Index (DXY) strengthens to a new 52-week high above 97, commodities are tanking along with global growth prospects into 2019, and North American government bonds are rising.
Oil is down for a record 12th straight day with West Texas Crude (WTI) -24% in a little over a month. Canadian oil–Western Canadian Select (WCS)–is trading at a record $45 discount to the December 2018 WTI contract, compared with a $15 discount just four months ago.
The most recent financial expansion cycle that began from March 2009 has wobbled several times over the past decade. And each time it has been saved by yet another serving of central bank intervention around the globe.
Market analysts who do not work for investment sales firms are in scarce supply at the best of times. But today, even the few who exist, and have a long career of the most useful analysis, have learned to tone down their comments of concern after six years of seeming like Cassandras.
Here is the thing: everyone gets a turn at looking dumb or wrong each market cycle. The thing that matters most, in the end, is how capital-destructive one’s period of being wrong ends up being. Did you miss out on some upside, or did you lose a bunch of capital? These are the real-life choices.
Perma-bulls and the riskiest assets always rise in popularity with prices and then crash and burn as bear markets arrive and customers/clients liquidate after losses and look for lawsuits to launch. That part of the cycle is next on deck.
It is still not too late for thinking people to review their present holdings and consider how steep price declines will impact their financial and life plans over the next decade and beyond.
As shown in the chart below of price cycles in the S&P 500 since 1994 from my partner Cory Venable, the market recovery from 2009 has been the most artificially elongated in history. If your investment plan assumes this uptrend will continue indefinitely or tread water as central banks remove their ’emergency’ support and a risk-appetite recedes, you are banking on unprecedented miracles and may want to re-think.
The correction since January is only a tiny start in the mean reversion cycle that is due for stock and corporate debt markets from present levels. A drop of 50% would just return the benchmark S&P 500 near its 2000 and 2007 cycle tops. History suggests that would be a fairly modest outcome in present circumstances, believe it or not.
‘Buy, hold and hope’ at high valuations has always been a dangerous financial strategy; but given the extraordinary monetary experiments and debt-fuelled speculating of the past decade, it has never been more dangerous than today.