No matter how many ways I try to pick apart the markets, today, the American stock market has been getting really ugly. For investors who’ve been counting on an end-of-year “Santa Claus rally,” the charts have been awash in a sea of red as yesterday’s leaders turn into today’s bleeders. Fear, uncertainty, and doubt are all setting into the markets, especially as a government shutdown looms and hundreds of thousands of federal employees go home without pay this week. Is this merely a run-of-the-mill correction or is it indicative of a market that’s coming apart at the seams?
As an analyst, I’m very cautious about saying “this time it’s different,” but the current downtrend in the U.S. equities markets is unique – and in reality, each crash is unique and has the potential to turn into a protracted bear market. We never really know just how bad a crash will be until much later, when all of the “hindsight analysts” come out of the woodwork and comment on what’s already happened.
The standard definition of a correction is when a stock or index declines at least 10% from its recent peak; a bear market (which some analysts would also call a crash) requires a drop of at least 20%.
When 20% or higher market declines happen, they’re generally not of the quick “V-shaped” variety; the average length is 338 days, and as we all know, the Dotcom bust and the Great Recession lasted longer than that. Bear markets feed upon themselves, with investors often selling simply because they see other investors selling.
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In the current market situation, the same tech stocks that have almost single-handedly led the market to all-time highs are now leading them lower. As the old saying goes, the bigger they are, the harder they fall. For investors in the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google), it looks like Santa’s only leaving a lump of coal in their stockings this year:
The downward trend of this chart could very well denote the beginning of the end of the longest stock bull market in history. The numbers don’t lie, as the Nasdaq has registered a 21.9% drop from its August 29 all-time high of 8,109.69 – and the last time the Nasdaq entered a bear market was on March 3, 2009, during the worst days of the Great Recession.
And it’s not only the Nasdaq that’s entering into bear market territory. The Russell 2000 (a gauge of small-cap U.S. stocks) and the Dow Jones Transportation Index – both often considered leading indicators of the health of the economy and market – are also now down at least 20%.
If you’re looking for catalysts for the market downturn, you’ve got plenty to choose from. The primary culprit, it seems, is the tension between President Trump and Fed Chair Jerome Powell, who can’t seem to agree on how fast interest rates should be raised or whether they should be raised at all. Rumblings in the press that Trump might fire Powell are only grist for the mill as the stock market rout picks up steam.
Not only do we have interest rates, but the ongoing U.S.-China tariff war, which evidently found little resolution at the vaunted G20 meeting, as well as the government shutdown, which the President has threatened “will last for a very long time”:
To these concerns, we can add Brexit and other European concerns, a national debt approaching $22 trillion, elevated P/E ratios in market-leading tech stocks, the fact that the bull market is ancient by historical standards… The bus only has so many wheels, and it appears that they’re all falling off at the same time.
From both a positive and negative sense, always keep in mind momentum creates momentum…
The long and short of it is that each crash is different, and I’m not expecting this one to mimic anything that has happened in the past from stocks to real estate, bonds, and gold, but know it’s coming…
The tension that is building up is unprecedented, and we are on the frontlines for a very spring-loaded 2019.
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Be nimble and ready for an epic turn of events to favor those in the know…
Chief Editor, CrushTheStreet.com
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