Intelligent Government Action Is Key to a Market Turnaround 9 comments
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Per a study by the AP, we are in the 15th bear market since the one which began in 1929 kicked off the Great Depression.
I have become fascinated over the past several weeks with the efforts by many market experts and pundits (not always the same thing) to “call the bottom.” The range of tools they use is broad: VIX, MACD, the AAII investor sentiment surveys, P/E ratios, the length of the bear market, the depth of the bear market, the breadth of the bear market, support lines, proprietary “signals,” the likelihood of government intervention saving the day, and on and on.
Some of the efforts leave me scratching my head. Does anyone really think that a technical support level established in 2002 has relevance today? Can anyone believe any longer that the series of record-smashing VIX levels, each of which supposedly proved that fear could not get any stronger, demonstrates that the VIX can predict the end of the bear? Can anyone really foresee what the impact of government intervention—particularly the to-and-fro implementation of the $700 Billion financial bailout package—is finally going to turn out to be? Think you have a clue as to what Obama’s stimulus package will finally contain, or whether it will work? I humbly submit that the answer to all those questions is “no.”
In terms of percentage lost, we are in the third-worst market crash of the 15 since 1929, down about 49% (S&P 500). (Worse declines: 1929-1932; 1937-1938; 2000-2002). In terms of length, at 13 months, this is right in the middle as the eighth-longest. (Longer ones: 1929-1932; 1933-1935; 1938-1942; 1946-1949; 1956-1957; 1968-1970; 1973-1974; 1980-1982; and 2000-2002.)
There have been enough whipsaw volatility days, mini-crashes and mini-rallies within the overall bear movement, and failed support levels to render the most well considered predictions meaningless. To keep calling out “the next support level” when the last one gets crushed seems foolish when the next level down occurred years ago.
Along with the bear market, we are in a recession--one that looks like it is going to be more severe and protracted than average. Some are suggesting that the recession is really Great Depression II. And again, the truth is that we do not know whether they are right or wrong.
Let’s assume that we are not, in fact, headed into Great Depression II. The question then becomes, what will the market look like when it hits bottom? Or more important, what will be some reliable signals that it is hitting bottom? We must ask these questions, because the traditional measures (listed above) have all failed.
The market is controlled purely by emotion at this point, specifically fear. Investors are fleeing the market, trying to save what they have left. When a market is ruled by fear, its movements are even more subject to over-reactions to news (and noise) than they usually are. We have seen that demonstrated in the neck-snapping volatility of the past few months. We saw it Friday (November 21), when the market jumped 500 points on the news that Obama would name Geithner as his Treasury Secretary. The market clearly saw that as good news, so it rallied. That is a pretty thin reed for a 500-point rally, and it just points out the hair-trigger state of investors right now.
If the market is dominated by fear and so highly reactive to news, I would postulate that what will help cause the market to turn around will be a spate of good news.
Here is a laundry list of good news items that, if extended for a few weeks and mostly uninterrupted by bad news, might have this effect:
- Continued generally positive reactions to Obama’s appointments.
- Word that Obama will allow the Bush tax cuts to extend as they are presently scheduled to do, until the end of 2010, without immediate tax hikes on the wealthy or anyone else.
- Positive guidance or outlooks issued by some bellwether companies, such as Google, GE, Microsoft, and the like, without an equal number of countervailing gloomy outlooks issued by other bellwether companies.
- Price stabilization, with neither inflation nor deflation being seen as a near-term risk.
- A decent percentage of positive earnings surprises at the end of the fourth quarter, especially from bellwether companies. Average earnings across a broad range of companies meeting or beating analysts’ consensus estimates.
- A well-received stimulus plan when it is fleshed out and announced, including more elements than just sending out checks to people, which didn’t work too well this year.
- A tapering off or cessation of banks needing bailouts. (Citi was bailed out over the weekend.)
- A sensible bailout plan (or other resolution) for the auto industry that investors generally can believe in.
- Sensible reactions to other industries lining up for bailouts.
- Sensible policies regarding the cities and states that are starting to line up for bailouts.
- A sense of bipartisanship and "country first" emanating from Washington
- A slowdown (if not reversal) in the number of new claims for jobless benefits.
- A slowdown in the rise in the unemployment rate, followed by a reversal.
- A meaningful slowdown in the number of new foreclosure filings, with the actual number of foreclosures going into reverse.
- Believable and understandable news that the credit markets are thawing, and that banks are lending again.
- News that withdrawal rates from mutual funds have slowed or reversed, and that some of the large amount of capital currently on the sidelines is starting to flow back into stocks.
- Announcement of sensible regulations for mortgage lending, hedge funds, derivatives, and other key elements in the financial industry.
- A flattening and then a rise in new building permits and new home starts.
- A month or two of increasing consumer confidence readings.
- A better-than-expected holiday retail season.
- Another rate cut by the Fed.
- Continued low prices at the gas pump.
- Some sense that markets around the world are stabilizing.
- One or several significant market rallies on high volume.
- A few weeks in a row where the market seems to react sensibly to the news of the day. A general sense from commentators that there is sanity instead of panic or euphoria.
- A persistent reduction in intraday volatility. An end to 900-point swing days for a while. An end to all the decisive market action taking place in the last hour.
- An upward “turn” in the stock markets that holds for more than two or three weeks. Normal noise and zig-zags are OK, but limited to the more usual 1% to 2% swings that characterize a market not in the grip of fear and panic.
More could be added, but you get the idea: The market will start to turn, and fear will start to abate, when investors are exposed to enough good news that they can see through the immediate carnage. At that point, the stock market may begin acting more rationally, and investors may realize that stocks are on sale now, and that their long-term best move is to get themselves back into the market.
One final note: It is too bad that so many items in the “good news” list are based on government actions (some would say interference) in the markets. But that is the reality we are in. Intelligent, positive actions by the government are going to have to be a large part of the solution to the current bear market.
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This article has 9 comments:
"The market will start to turn, and fear will start to abate" when equities reach what people believe are reasonable valuations in light of the economic downturn. This would happen swiftly if the government could butt out.
The government is only confusing the markets, rewarding bad actors and shifting resources to where they would flee in a free market. The market can find a bottom and begin the process of rebuilding on a more solid foundation, or the government can continue the decades-long process of misleading the markets with easy money and bailouts and try to rebuild on a foundation of sand.
intelligent + government + action = market_turnaround
0 = 1
"If the market is dominated by fear and so highly reactive to news, I would postulate that what will help cause the market to turn around will be a spate of good news."
we have a herd of people on the sidelines yelling for people to invest right now with horrid economic news dropping almost daily. they are creating uncertainty as investors see things are not good, but these pumpers are screaming things are cheap, cheap, cheap. if they would just shut up for a little while to let things settle down the market would become less volatile, less emotional, and more investable even with bad news. there is no expert who understands what to buy except for day trades.
Most of the good news items I listed are not government-based, but unfortunately many of them are. That appears to be why SA changed the title, but the title no longer reflects the thrust of the article.
Dave
It is probably not much of a stretch to state that things will get worse before they get better, which is sort of the conclusion someone would draw from the good points made in the article.
2) That said, it is not surprising we did learn some things from the last depression.
3) I'll put myself out there and say that the market will have painfully cleansed most of it's excesses by 2011 and that we'll see a sustainable bull market by 2013.
In reference to the article, I like the thought style. Obama can do one thing well President Bush didn't and that is to communicate the truth to the American people and often. That is going to be unpleasant for Obama to do on a frequent basis for the first couple of years.
Most of the items in your laundry list of good news will depend on individuals' perception of the long-term consequences of the many government actions already underway. Many people realize the "cures" being offered up (cheap, easy, abundant credit/debt) are the cause of our disease. These cures are being funded with additional debt/printed money.
The sad truth is all policy actions being implemented are more of the same actions that casue these boon-bust sycles. We may get increasing confidence in the market periodically but this will then be reversed when the unintended consequences of the cures begin to be seen.
Face the downturn, implement Glass Stegal, force disclosure of CDS liability, bankrupt bad banks, capitalize the remaining. That's the best remedy.