Amidst a bear market, there are always upward corrections referred to as bear market rallies. This Tuesday, March 24, the Dow Jones Industrial Average index had its fourth greatest daily percentage gain ever at 11.36%, being surpassed only by the Great Depression, as the graphs below show. In addition, the S&P 500, at 9.38%, had its ninth biggest climb ever. As you can see, the largest upward moves have come about during the most severe financial crisis. Accordingly, the biggest gains occurred on the Great Deppression, which happened to be the greatest financial meltdown and economic downfall in American history. Furthermore, the current crash is taking the ominous contours of the Global Financial Crisis and, looking at the graph below (data up until March 25), the 1930's Depression. On all occasions, the highest dead cat bounces follow the most intense collapses. Additionally, the S&P 500 was down 32% in the one month period ending on Monday, March 23. Albeit the Dow and the S&P 500 having soared, respectively, 21.3% and 17.55% in the last three days (from March 24 to 26), considering the analogue with the Great Depression, such a rally may not be a sign that a turnaround is on the cards but be a harbinger that we are far from the bottom. Bearing in mind the US and the planet in general are experiencing a widespread lockdown to tackle the spread of the COVID-19, the financial markets at large will bounce along the way, though maybe only after more short-term pain. Additionally, in 1929, the S&P 500 and the Dow fell 45% and 48% in the first two months of the bear market, respectively. In spite of the recent uptick, those indexes are prone to tumble as much as in 1929. Hence, the present crash will not match perfectly, still it should rhyme. Moreover, after the two-month plunge in 1929, there were 50% and 60% retracements respectively in the Dow and the S&P 500 that lasted about four months, throughout early 1930. Despite taking the view the current situation is not comparable to that one due to the impact of the Wu flu, the stock market may experience a relief rally at least as strong and enduring, though a little later in the down cycle. Thus, before the markets are granted that long awaited relief, there is a strong likelihood this initial down phase of the stock market will drop lower than the 1929 one. In addition, after the four-month relief rally into April 1930, during the Great Depression, the market headed down again in a big way before throughing two years later in 1932, with the Dow and the S&P 500 down 89% and 86%, respectively. Although the market crash and global recession being a month old, stocks are expected to be substantially lower from here until the bottom of this epic economic downturn is hit. Furthermore, total US market cap to GDP is only retesting the levels at the peak of the housing bubble, as is shown below. Undoubtly, the stock market is falling from truly absurd valuation levels. Likewise, the prices of corporate bonds, both IG and HY, have also been surging since the announcement made by the Fed, this Monday, that it was going to purchase IG corporate bonds and ETFs which tracked such bonds. Inversely, Treasury bonds seem to tell a different story. Inasmuch as bonds have been going sideways while stocks have shot up, this signals there is still a lot of fear among market participants, and the trust in the creditworthiness of the US government as well as the confidence in the dollar persist (for now!). Finally, the reasons why the Great Depression unfolded are somewhat discussed in Keynesians and the Chicago school, but, in a nutshell, it was due to central planning and government meddling. Additionally, it was a period marked by deflation with a lot of liquidation and debt (money supply) contraction, such as today. However, corporatism was not as prevalent as nowadays (see the previous post) and the mainstream economists and technocrats at the Fed and the government did not see inflation as the cure to all evils. Therefore, unlike today, the government did not bail anybody out nor the Fed increased its balance sheet via QE, TARP, repo operations and the like. To conclude, the stock market is going to much lower magnitudes. Yet, because of the keynesian mindset and Wall Street plus corporatistic cronyism, the Fed will print as much needed to keep financial markets afloat and maintain the status quo. As I have been explaining, this will likely create massive debasement of the dollar, resulting in rising prices in consumer goods and assets like shares. Consequently, the US stock market could in a few years resemble its Venezuelan namesake. Evidently, like in Venezuela's case, were this to occur in the US, it would not mean the market is a reflection of a booming economy. Instead, it would simply hint at an ever more worthless currency, with the dollar following the steps of the bolívar.
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AuthorDaniel Gomes Luís Archives
March 2024
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