Displaying items by tag: bear market

(New York)

The whole market (and the media) seems to be worried about a looming recession. Driving that fear are many factors: a surging economy, very high market valuations, and a nearly inverted yield curve. Several big banks and research houses have put out warnings of a looming recession and bear market. However, one of the most prominent, Goldman Sachs, has just gone on the record doing the opposite. The bank says there is only a 36% chance of recession in the next three years, a figure below the historical average. “There has been increasing investor interest in the chance of a recession in the U.S. over the next few years … Our model paints a more benign picture”, said GS economist Jan Hatzius. The bank did note that if a US recession does occur, it will likely drag many developed economies down with it.

FINSUM: Recessions are famously hard to call, so we won’t go one way or the other. That said, there are some signs that a recession is looming. We certainly think the odds are higher than 36% for the next three years.

(New York)

We run a lot of bearish stories in FINSUM, and with good reason—there are a lot of them out there and we feel the need to share those views with advisors and investors. However, when there is a credible bullish story, we jump at the chance to run it. Today we have one. Robert Shiller, perhaps the godfather of doom and gloom with his CAPE ratio, has just made an uncharacteristic statement: he says that stocks may rise much higher before eventually falling. The Nobel laureate says “The stock market could get a lot higher before it comes down … It’s highly priced, but it could get much more highly priced”. Shiller had previously been warning (last year) about how overpriced the market was. Shiller says the reinvigorated market has to do with President Trump’s pro-business drive.

FINSUM: It is interesting to hear someone as typically bearish as Shiller saying that stocks may rise a good deal more. Something to pay attention to.

(New York)

A big bank has just gone on the record warning investors that a bear market is likely to start by the end of the year. So long as the Fed hikes twice more this year, which it is widely expected to do, a key bear market indicator will have been tripped. That indicator is the so-called “neutral level for interest rates”. The indicator preceded both the 2000 and 2007 bear markets. The idea is that the Fed will raise interest rates above their “neutral” level—the level at which they neither stimulate nor hold back the economy—and in doing so, will bring on a recession and bear market. The observation comes from bank Stifel, which summarized their view as “Weighing stability versus mandate, we believe the Fed has no realistic option other than to follow its projected dot-plot path, eventually revealing the speculative excesses created in the past decade”.

FINSUM: When you combine this indicator with the near yield curve inversion, it paints a very bleak picture indeed.

(Washington)

Recent polls have shown strong gains for Democrats, raising the prospect that the party will take back the House and maybe even the Senate. So what would that mean for stocks? Well, the historical picture is mixed. Generally speaking, stocks have a rough September heading into the November midterms. However, immediately before and after the election, they are relatively unaffected, no matter the outcome. Generally speaking, from the beginning of October until the end of the year (in a midterm year), stocks rally strongly.

FINSUM: The basic picture here is that we could be in for a rocky month, but that stocks may do well as we approach and move past the midterms and investors get used to the ‘new normal’, whatever that may be.

(New York)

Even if you aren’t thinking about it yet, the president is. In an interview yesterday, President Trump said that the stock market would crash if he were impeached. No one can be sure, but history suggests it would have little impact on the market. In the two previous cases in recent memory—Nixon and Clinton—the market behaved differently, falling sharply in the 12 months prior to Nixon’s impeachment, and rising before Clinton’s. JP Morgan’s best guess is that an impeachment wouldn’t be enough to derail the markets and economy itself.

FINSUM: Another interesting argument is that Trump wouldn’t ever be impeached until the market headed south, as that has happened in both of the previous instances (there was a brief but steep correction before Clinton’s impeachment). Nonetheless, we really don’t think Trump will be impeached.