Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
@MFO Members: Here is the Barron's article for those who do not have a subscriptiion. Regards, Ted (Click On Article Title At Top Of Google Search) "Bears, Return to Your Caves—at Least for Now"
I'll admit to the same confirmation bias as a disclaimer, but I feel like more bullish articles are being written and more media attention is being paid to the bullish case recently, whereas for a long time most of the attention seemed directed towards the perma-bears and those who were at least cautious. As that becomes more and more common I think we'll start building toward an end. That may still take some years, though, not just limited to the end of this year.
WHERE CAN THIS GO WRONG? We don’t pretend to foresee black swans, which, by definition, are unpredictable. So take your pick of unlikely but not-impossible scenarios. A hot war in North Korea, or worse? Tax reform goes the way of “repeal and replace”? Federal Reserve Chair Janet Yellen suddenly wakes up one day from a fever dream and abandons the Fed’s gradualist approach to raising interest rates?
I'm not sure these are unlikely scenarios, particularly the war one. But I agree with the article's premise that valuations alone usually don't trigger a bear. There needs to be a catalyst to get investors to panic. But one scenario they left out is a major scandal at a bellwether stock. If you remember the 2000-02 bubble/crash it was really Worldcom and Enron that exacerbated the crash by a significant degree on top of 9-11 attacks, although interestingly enough I think the reaction to the attack was more fleeting than the scandals. Often the scandal also is tied to leverage somehow--both of which Worldcom and Enron and investors investing in dotcom stocks in general had in spades. The leverage factor was what exacerbated the subprime mortgage scandal in 2007-08. Excessive debt often causes forced selling whether investors claim to be buy and hold or not.
Interestingly enough, a lot of leverage has been assumed most recently to buy back stock, what this article states as a positive. Also interesting is the idea that "bear markets are generally caused by recessions." I have the impression in recent cases the opposite has been true--recessions have been caused by bear markets. I don't think the economy was in a recession when the 2007-2008 crash began or 2000-2002 one. Those crashes triggered the recessions, not the other way around, I think. If someone has evidence otherwise that the recessions preceded the bear markets, please tell me. My memory might be wrong on this one, but when I look at the data it seems correct: https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States Or is it a feedback loop, chicken-egg scenario, where bad news on the market and economy feeds on each other.
(Graham) In the short run, the market is a voting machine but in the long run, it is a weighing machine"
(Samuelson) "Wall Street indexes predicted nine out of the last five recessions!."
As the Barron's article seems to suggest (ignoring its final paragraph), both recessions and bear markets can be caused by another underlying (latent) factor. The chicken and egg question comes in when one considers timing. Recession-causing factors could have a faster effect on the stock market than on the economy, making it appear that a bear market caused a recession.
In it, he observes that the longer the bear market, the better its predictive accuracy. That jibes with Graham - over a longer period of time, the market is a weighing machine. He notes that weakness in stocks can affect companies' access to cash and reduce consumer spending ("the wealth effect") thereby affecting, if not effecting, a recession. At least it's nice to see an actual theory put forth on a causal link.
Comments
Regards,
Ted
(Click On Article Title At Top Of Google Search) "Bears, Return to Your Caves—at Least for Now"
https://www.google.com/search?source=hp&q=Bears,+Return+to+Your+Caves—at+Least+for+Now+Barron's&oq=Bears,+Return+to+Your+Caves—at+Least+for+Now+Barron's&gs_l=psy-ab.3...4153.9790.0.11797.12.11.0.0.0.0.183.1536.0j9.10.0.dummy_maps_web_fallback...0...1.1j2.64.psy-ab..2.7.1198.6..35i39k1j33i160k1j33i21k1.169.sbMr97ko4x0
Interestingly enough, a lot of leverage has been assumed most recently to buy back stock, what this article states as a positive. Also interesting is the idea that "bear markets are generally caused by recessions." I have the impression in recent cases the opposite has been true--recessions have been caused by bear markets. I don't think the economy was in a recession when the 2007-2008 crash began or 2000-2002 one. Those crashes triggered the recessions, not the other way around, I think. If someone has evidence otherwise that the recessions preceded the bear markets, please tell me. My memory might be wrong on this one, but when I look at the data it seems correct: https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States
Or is it a feedback loop, chicken-egg scenario, where bad news on the market and economy feeds on each other.
(Graham) In the short run, the market is a voting machine but in the long run, it is a weighing machine"
(Samuelson) "Wall Street indexes predicted nine out of the last five recessions!."
As the Barron's article seems to suggest (ignoring its final paragraph), both recessions and bear markets can be caused by another underlying (latent) factor. The chicken and egg question comes in when one considers timing. Recession-causing factors could have a faster effect on the stock market than on the economy, making it appear that a bear market caused a recession.
Here's a modest column by Steve Liesman (CNBC):
Can the markets predict recessions? What we found out
In it, he observes that the longer the bear market, the better its predictive accuracy. That jibes with Graham - over a longer period of time, the market is a weighing machine. He notes that weakness in stocks can affect companies' access to cash and reduce consumer spending ("the wealth effect") thereby affecting, if not effecting, a recession. At least it's nice to see an actual theory put forth on a causal link.