Look Out Below!

Stocks... bonds... real wages... worker productivity... GDP...

Joel Bowman, reckoning today from Buenos Aires, Argentina...

Equities... bonds... real wages... worker productivity... GDP... 

Down... downer... downest!

Let’s start with stocks. The blue-chip Dow Jones Industrial Average, representing 30 of the spiffiest companies listed in the United States, is off 10% year-to-date. The broad S&P 500 is lower by 14% over the same period. And the tech-heavy Nasdaq, already in a technical bear market (as indicated by a drawdown greater than 20%) is down a whopping 23% and change for the year. 

Hmm...

Does this count as “blood in the streets,” to borrow Nathan Rothschild’s famous description of the right time to buy? Ought savvy investors to be backing up the proverbial truck? Not so fast...

Given the gains notched since 2009, it’s easy to forget just how high prices rose and how fast. Take the Nasdaq 100 (which includes 100 of the largest non-financial companies in the Nasdaq Composite and accounts for over 90% of the movement of the index) as the most conspicuous raging bull in the room. Yearly returns read as follows (H/T @charliebilello)...

2009: +55%
2010: +20%
2011: +4%
2012: +18%
2013: +37%
2014: +19%
2015: +10%
2016: +7%
2017: +33%
2018: +0.04%
2019: +39%
2020: +49%
2021: +27%
2022 (YTD): -23.29 

Now here’s a chart, drawing back a few decades, for the visually inclined. Note the run-up since the 2008-09 Global Financial Crisis (recession indicated by the second shaded area from the right), which went practically vertical around the 2020 recession (thinnest gray line on the right)...

(Source: macrotrends.net)

To put those massive, outsized gains in perspective…

• Another 10% decline from here would only take you back to Oct. 2020... 

• A 20% fall would put you roughly on par with where we were about June of that same year... 

• A 30% plummet from today’s level gets you all the way back to April of 2020... 

• A gut wrenching 40% free-fall would only wipe out gains since early 2019... 

• In fact, the index could be cut in half from here, and we’d only be back to 2018 territory. 

Reckon we’ve still got room to fall? You betcha! 

“Incidentally,” observes Bonner Private Research macro analyst, Dan Denning, “with both stocks and bonds down more than 10% year-to-date, this is the first time both have been positively correlated—and gone down—since the mid-1970s.”

We’ll have plenty more from “that ‘70s show” in tomorrow’s Sunday Sesh...

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In the meantime, here’s a choice snippet from the research note Dan sent around to BPR subscribers on Friday afternoon...

Although the Nasdaq is already in a technical bear market, the S&P 500 is not yet ‘officially’ there. Give it time. This brings up the two big questions you should be focused on: how long will that bear market last and how long will it take you to recover from a 50% drawdown?

You can throw the 2020 bear out the door. That marked the beginning of the huge monetary and fiscal distortions that drove stocks up—and quickly. That is not going to happen again (although I’m sure some people would debate me on this and say more QE after a crash is a certainty at this point…we’ll see).

The average price decline in a bear market is 37.3% and the average duration of the bear market is 289 days, according to research published this week from Bank of America’s Michael Hartnett. His team calculated that there have been 19 ‘technical’ bear markets over the last 140 years.

Based on those numbers, and noting that past performance is no guide to the future, Hartnett’s team reckons the S&P’s bear market would end in mid-October, at around 3,000...

Bottom line: on an annual and historic basis, the bear market has barely done half its work. It doesn’t feel like that right now. We’ve had three days in the last ten where 90% of the stocks in the S&P 500 were in the red. But that is not the end of the world.

It is the beginning of the end of the world. And it’s an impressive beginning. But don’t fall for the rallies, which in a bear market (and when short positions are being covered) can be vicious and deceiving. Keep your eye on the big picture.

Stay in Maximum Safety Mode. Meanwhile, we’ll look for pockets of green where stocks or sectors have already bottomed, and companies or sectors have pricing power in the current environment. 

What’s a dear reader to do? Here’s Dan, again...

We’ll keep looking for pockets of opportunity that have decoupled from the index. The risk, of course, is that you’re swimming against the tide of liquidity, which is currently going out. Even if you find a good business, attractively priced, significantly ‘de-risked’ by recent price action, with a strong cash position and pricing power, it’s still a stock. And in a bear market, most stock go down.

Still, that’s the research we think is worth doing now. And that’s great news. Individual investors who are willing to work hard, think for themselves, and then take small, calculated risks, should be licking their chops for the days to come. There is more mauling ahead. But there are also targets of opportunity if you’re willing.

As mentioned in this space throughout the week, BPR investment director, Tom Dyson, recently added five “counter-offensive” stocks to the BPR watchlist. As of Friday, all five had spent the week healthily in the green... even as the rest of the market was awash in a sea of red. That’s what real world businesses that deliver real world goods to real world people (for real earnings!) are supposed to do. “Targets of opportunity,” as Dan says. 

If you’d like to become a BPR member and gain access to all Dan and Tom’s work, you can do so below. Having been in and around the financial publishing business for going on 20 years now, I can tell you nobody is doing the work these guys are doing at this rate... not even for ten times the price. Jump on board here, for less than $2/week...

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And now for Bill Bonner’s missives from the past week...

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That’s all from us for today. Tune in tomorrow for your regular Sunday Sesh, where we calmly and humbly solve all the world’s problems, one glass of malbec at a time. (Ok, not really…but it’s still a lot of fun!)

We also catch up with Byron King for the latest installment of your Fatal Conceits podcast, the show about money, markets, mobs and manias... not necessarily in that order.

Over the course of a casual hour or so, Byron had plenty to say on everything from the unintended consequences of international sanctions against Russia… the mechanics of a gold/methane-backed ruble… Team Bidenomics decision to “sell low, buy high” on the Strategic Petroleum Reserve and plenty more…

Don’t forget to join us… and to invite a friend or foe along for all the action, here.

Hasta mañana…

Cheers,

Joel Bowman

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