The question of whether or not we are entering a sustained bear market is garnering much more attention in light of the recent weakness in US equities, and due to recent comments from Dow Theory pioneer Richard Russell. In this post we'll take a look at whether or not a bear market is imminent. As the title suggests, I don't believe that is the case.
To put things in context, let's take a look at a chart of (SPY), which tracks the S&P 500 index.
From a technical perspective, I do think we are seeing some signs of a reversal that could push the S&P down. However, I think there is strong support at 1150, which would constitute a 15% decline from where we currently are. I consider it reasonably probable that the market spends a fair amount of time consolidating between 1150 and 1400.
However, I do not think a repeat of 2008 is in the cards. There are a few reasons for this:
1. This is an election year, and the money supply as measured by MZM is still setting new all-time highs. With interest rates where they are and with the Fed's recent history of aggressively inflationary policies, I don't foresee this situation reversing. And according to a study from T. Rowe Price, the S&P 500 has risen in 12 of the 16 Presidential election years since World War II. To put it simply: I think the Fed will defend against a sustained bear market.
2. Richard Russell stated he has an ominous feeling about the economy, and I certainly agree. Those of us who draw from the Austrian school of economics -- and I certainly put myself in that category -- will resonate with the idea that the stock market is prone to perpetual weakness so long as debt levels remain high and savings rates remain low. Future earnings come from access to credit or current savings; with credit levels nearly maxed and savings levels destroyed, the odds of a self-sustaining recovery without some form of debt cancellation (either through inflation of the money supply or formal debt cancellation) remain low. Without earnings, US equities are prone to weakness. Ultimately, though, I believe the Fed will use inflation to eradicate debt; this will have many negative consequences, though it will help US equities stabilize.
3. Last but certainly not least is the bond market. I feel like a broken record talking about this, but the problem is huge and growing; the nation-state governments of the world face over 7.6 trillion in debt maturity payments this year. As the insolvency of the US Treasury becomes more apparent, what will happen to capital in the bond market -- where will it go? I think some of it will find its way into US equities.
4. Perhaps of even greater interest are the bank failures in the US, which, in spite of being underreported, continue to progress. If banks are failing, where will capital go?
I think it is worth noting that not all stocks are created equal -- far from it, in fact. I think we may see some sluggishness and a sustained rangebound price movement in the S&P 500 and other major indices, but certain sectors will do especially well. Dividend-yielding stocks, energy stocks, and the natural resource sector are especially important, in my opinion, and I think there will be some fantastic opportunities there even as the broader indices don't do much besides tread water. Bears looking for something to short might find some interesting opportunities in the technology sector; components of the (QQQQ) might be a good starting point for further research.