Category: bull market

Event and Response

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March 15, 2020

by Steve Stofka

The response to an event is part of the event. While driving on the highway this week, I listened to an NPR report on the relatively few deaths from the COVID-19 virus. I passed under a sign telling me that almost 600 people died in my state last year in auto accidents. The number of deaths nationally was almost 39,000. In 2019, we had almost 20% fewer fatalities than 2002 even though we drove 20% more miles during the year (CDOT, 2020). Cars are safer now because the government set safety standards for car manufacturers. Our institutions are strong. We tackle thorny problems and fix them. Was the reaction to this virus a bit too strong?

On Friday, the death toll from the virus climbed to 50. During the winter flu season of 2017-18, the CDC estimated 70,000 deaths (CDC,2020). That’s over 1300 per week. 50 didn’t seem so bad. One person on Twitter thought this panic buying of toilet paper was all silly. Then he went into his grocery store and the shelves were empty of Twix, his comfort chocolate. A bit of black humor. We may need more humor in the weeks to come.

Despite the mortality from flu each season, the world community has built a collective herd immunity to the disease over the past two thousand years. What’s herd immunity? If I have antibodies against a virus, I won’t be a carrier of the virus to someone else. This reduces transmission of the disease. COVID-19 is a new type of coronavirus. No one has built an immunity, so it travels fast.

Six months ago a friend asked me what I thought about the stock market. I told him I thought it was overpriced. Should I sell some of the stocks in my 401K, he asked? I shrugged. What if stocks went down 50% like in 2001 and 2008, I asked? Would you panic? He didn’t really need the money for five years, so probably not, he said. I’d be anxious, he said. Would you be anxious if you had no money in the stock market, I asked? Yeah, he said. I hear about the stock market on the radio, get news about it on my phone. I’d worry there was another crisis like the financial crisis coming. Do you think stocks are going to go down 50%, he asked? I said I have no idea. If I knew the future, I would have to hide away in a cave somewhere because people would want to kidnap me and make me tell them what the future was going to be. The past has already happened and very often we don’t understand what happened. Even if we knew what the future was, we would have trouble understanding it.

The long bull market in stocks ended this week and the SP500 index officially entered a bear market 20% below its recent high. The bull market almost ended in 2018 when the index fell 19% from a recent high but that didn’t count. 19% is not 20%. What about 2011 when the 20% decline occurred during a trading day but recovered enough by the end of the day to be a decline of less than 20%? That didn’t count either because the “official” declaration of a bear market is based on the day’s closing price. If the 20% decline benchmark were based on the yearly closing of the SP500, we still are not in a bear market (only 16.1% down) and didn’t come close in 2018 or 2011.  But that’s not newsworthy, is it?

The financial crisis came about because of a contagion in our financial markets. That led to a contagion of distrust in our institutions in this country and around the world. The current crisis started with a contagion between people that is spreading to our financial markets. This week the Federal Reserve stepped in to stabilize the bond market (Cox, 2020).

U.S. Treasuries are the benchmark for safety around the world. Companies around the world with long term obligations – banks, insurance companies and pension funds – hold U.S. government debt. The key word in that last sentence is “hold.” As fear gripped the market in Monday’s open this week, long term Treasuries surged 10% in price. A lot of buyers wanted safety. In response, companies that would normally hold their Treasury bonds wanted to take advantage of the price increase, so they put some of their bonds on the market. The bond dealers were not equipped to handle this much previously issued long term debt coming to the market. They are accustomed to trading newly issued Treasury debt. They had trouble matching buyers and sellers. Even as the stock market fell 10% on Thursday, the price of long-term Treasury bonds fell 4% in the last few hours of that afternoon. They are supposed to move in opposite directions. Something was wrong. If there were problems in the U.S. Treasury market, it could spread another kind of contagion throughout the bond market. The stock market is like a toy boat floating on the big pond of the bond market. On Friday morning, the Fed announced that they would start buying Treasuries, starting with long-term bonds.

The financial crisis of a decade ago demonstrated that the response to a crisis becomes part of the crisis – for good or bad. A crisis creates a bottleneck which causes unexpected consequences which may need unexpected policy responses. I tell myself that our institutions are strong, that we fix problems. I’m starting to worry more about the people who stock up on a year’s supply of toilet paper. It will not save them from the zombie apocalypse. The zombies eat people, not toilet paper. I thought everyone knew that by now.

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Notes:

CDC. (2020, January 10). Disease Burden of Influenza. Retrieved from https://www.cdc.gov/flu/about/burden/index.html

Colorado Department of Transportation (CDOT). (2020, February 25). Colorado Fatalities since 2002. [PDF]. Retrieved from https://www.codot.gov/library/traffic/safety-crash-data/fatal-crash-data-city-county/Colorado_Historical_Fatalities_Graphs.pdf/view

Cox, J. (2020, March 14). The Fed to start buying Treasuries Friday across all durations, starting with 30-year bond. CNBC. Retrieved from https://www.cnbc.com/2020/03/13/the-fed-details-moves-to-buy-treasurys-across-all-durations-starting-with-30-year-bond.html

Photo by Jay Heike on Unsplash

Bull Runs

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September 17, 2017

Lloyd Blankfein, the CEO of Goldman Sachs, commented recently (CNBC) that the length of this bull market has worried the traders at Goldman. Being a curious sort, I wondered how this bull market compared to previous ones. Wanting a big picture, I looked at the quarterly data for the SP500 index for the past sixty years. A lengthening sequence of quarterly closes above the three-year average is a reliable indicator of a bull market.

In the 1980s, the SP500 had a run of 19 consecutive quarters above its three-year average. That streak ended in the 3rd quarter of 1990, at the start of a mild recession that lasted until March 1991. The animal spirits of the stock market could not be contained for that long. After one quarter down, the market began another streak in the 4th quarter of 1990, a monster bull run of 40 consecutive quarters above the average until the first quarter of 2001.

BullRun1990s

The end of the dot-com boom, the start of a mild recession, then 9-11, the Enron and accounting scandals – all of it led to a 50% drop in the index. Almost three years later, the market finally closed above its three-year average. That began a 17-quarter bull run that ended March 2008.

BullRun2000s

People were getting woke to the reality that housing prices can go down. The neighbor living in the house behind my folks in NYC said to me, “I don’t know what’s going on. Housing prices are not supposed to go down.” As though housing prices obeyed a fundamental physical law like gravity. The bailout of Bear Stearns that first quarter of 2008 was just the beginning of a developing financial crisis that would cripple the global economy. In 2010 and 2011, market prices clawed their way above the 3-year average only to fall back.

Finally, in the last quarter of 2011, after the fitful resolution of the budget crisis, the SP500 broke again above its 3-year average. Since then the market has notched 24 consecutive quarters above that average. This latest bull run has beat every previous SP500 streak except for the 1990s run up.

Bullrun2010s

This is what is worrying Blankfein and the traders at Goldman. Long bull runs in the past have ended horribly.  Like the bull run in the 1990s, there have been few negative, or corrective, quarters during this run.  Those are the quarters in red in the chart above. Some negative sentiment acts as a constraint on ever climbing asset prices.  For now, investors are convinced that inflation and interest rates will remain low, a prime environment for stocks.

Procession, Not Recession

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May 24, 2015

Existing home sales of just over 5 million (annualized) in April were a bit disappointing.   Since the recession, there have been only about six months that sales have been above a healthy benchmark of 5.2 million set in the late 1990s to early 2000s.

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Procession, not Recession Indicator

When reporting first quarter results, many of the big multi-national companies in the Dow Jones noted that sales had declined in Europe.  The broader stock market, the SP500, has not had a 5% decline for three years and is due for a correction.  Greece is likely to default on their Euro loans in June.  Combine all of these together and some pundits predict a 30 – 40% market correction this summer and/or a recession this year.  Corrections can be overdue for a long time.  Some treat the stock market as though its patterns were almost as predictable as a pregnancy.  Here’s an early 2014 warning that finds a chilling similarity between the bull market of today and, yes, the one before the 1929 crash.

Bull and bear markets tend to confound the best chart watchers.  The bear market of 2000 – 2003 was not like that of 2007 -2009.  Some argue that market valuations are like a rubber band.  The longer prices become stretched, the harder the snapback.  However, the data doesn’t show any consistent conclusion.

The 2003 – 2007 bull market ran for 4-1/2 years without a 5% correction.  That one didn’t end well, as we all know.   The mid-1990s had a three year stampede from the summer of 1994 to the summer of 1997 before falling more than 5%.  After a brief stumble, the market continued upwards for a few more years.  Turn the dial on the wayback machine to the early 1960s for the previous stampede, from the summer of 1962 to the spring of 1965.  That one ended much like the 1990s, dropping back before pushing higher for a few more years. These long runs occur infrequently so there is not much data to go on but the lack of data has never stopped human beings from predicting the end of the world.

April’s Leading Economic Indicator was up .7%, above expectations, but this increase was helped along by an upsurge in building permits.  This series has been unreliable in predicting recessions and its methodology has been revised a number of  times to better its accuracy.  Doug Short does a good job of tracking the history of this composite and here is his update of April’s reading.

A much more consistent indicator of coming recessions is the difference in the interest rates of two Treasury bonds.  The time to start thinking about recessions is when the 10 year interest rate minus the two year rate drops below zero.  The current reading simply doesn’t support concerns about recession in the mid-term.

The Federal Reserve has made it easy for us to track this flattening of the yield curve.  They even do the subtraction for us.  The series is called T10Y2Y, as in “Treasury 10 year 2 year.”