The 40 Year-Old Bull Market is Dead
Updated: May 28, 2020
The coronavirus has been tamed. What ravaged our nation was a temporary health crisis, not an economic crisis. Prior to the pandemic, the markets were sound, and the economy was strong. The coming Election and oath of office will resemble the previous fifty-eight Presidential Elections—a seamless reelection of an incumbent or a peaceful transition to a new leader.
Prior to the coronavirus crisis, despite claims America savored the world’s greatest economy ever, persistent, near record low U.S. bond yields warned of an unbalanced economy. An entire Chinese province was locked down. Bond yields teetered. Crude oil stumbled. Considered the only game in town, equities surged. Finally, near the end of February, the world recognized the pandemic’s economic risks. Bond yields crashed, oil collapsed, and the equity market plummeted.
Then, on Monday, March 23, 2020, after the market closed, President Trump issued his Beautiful Day proclamation. He wanted the economy to reopen by Easter. It was a beautiful timeline. Pews would be full on the holiest day. Businesses would have time to recalibrate and full throttle their engines. In after-hours trading, futures skyrocketed. Within days, the equity markets rallied more than 20%. Three weeks later, Easter Day passed, the country remained dormant. The equity markets shrugged. Trump remained on the offensive. Vaccine or no vaccine, he vowed America was back. The equity markets agreed; the rally has continued. But the bond market? Not so fast.
An aggressive snap back from the lows of Dow ~ 18,200 and the SPX ~ 2,200 was not shocking. Reaching Dow 24,000 and SPX 2,900, then breaching those levels and maintaining it, have stunned me. Another instance where I was dead wrong.
Prior to coronavirus, the economy was far from the greatest in history. In fact, it was no better than the last six years under Obama; after he spent the first two years in office pulling the nation out of a ditch. In many parallels, the current economy was worse. While Trump’s GDP growth eclipsed Obama’s record by a hair, it took a massive tax cut that grossly benefited the wealthy and exploded the deficit to do it. Unemployment fell to record lows under Trump, but that long-term trend was already in place. Moreover, historic low unemployment was a global phenomenon. Prior to the pandemic, Japan, Germany, and a host of other western countries had lower or similar unemployment rates as the United States. Additionally, during the last three years under Obama, the Democratic administration created 1.6 million more jobs than Trump’s regimes first three years. Finally, Trump’s first three years produced real wage growth at less than half the rate of Obama’s last three years in office. No, the economy wasn’t the greatest ever. The economy was spinning its wheels, slowly sinking into the mud. The bond market signaled this for months. It knew the equity markets were on borrowed time long before a pandemic struck it down.
Assume my analysis is wrong. That the economy was solid and about to gather stream. Can you say with utmost confidence the 2020 Election will be fairly contested? Many can’t. Neither can I. Considering Trump’s words and actions, do you envision a seamless reappointment if he’s victorious. How about a peaceful transition if he loses? Either way, I see Trump burning down the house. In victory, he will be invigorated. Egged on by his GOP enablers, expect Trump to seek total and final victory over every perceived enemy—including the media. The thoughts how far Trump may take it are chilling. In defeat, are you not concerned Trump will contest the results and plunge us into a once unthinkable constitutional crisis? Even if he grungingily vacates the office, do you trust he won’t incite his base to openly defy the Democratic President—and encourage violence? History has proven he is capable of anything. The bond market understands.
Again, let’s say my analysis is hogwash. Extreme paranoia. Point granted. Regardless, there’s one last hidden concern. The virus. It’s gone? Just like that? It’s potential to ravage society vanished by Trump hyperbole. Now the economy is going to sling shot itself back to historic heights and eclipse what only months ago was falsely deemed the greatest economy ever? Seriously?
The virus is lurking. My studies indicate we’ve seen nothing yet. When it reemerges, and that could be as soon as late June, early July, the eagerness to will it away will be overwhelming. Wishful thinking will lead to inaction—again. Only this time, we won’t be tardy in response, we will cavalierly dismiss the risks altogether. The damages will be incalculable.
With all three major concerns lingering and the Dow ~ 25,500 and SPX ~ 3,036, the long equities risk-reward ratio is awful. Really awful. Currently, any level above Dow 22,000 and SPX 2,600 is unwarranted risk. If none of these issues becomes reality, a middling economy will erode recent gains. If only the economy falters, previous lows will be tested but hold. If any two or all three trepidations materialize, expect new lows to stress the financial system. Don’t be shocked if the markets shutter for some time. It won’t be the end of the world. It will be the end of a long cycle. Allowing for a much-needed rethinking of how yields are returned to society.
It won't be long for the second shoe to drop. Come November, expect the trifecta.