Wednesday, December 26, 2018

Mark Hulbert — This still looks like just a stock-market correction, not something worse

The stock market’s recent correction has been more abrupt than you’d expect if the market were in the early stages of a major decline.
I say that because one of the hallmarks of a major market top is that the bear market than ensues is relatively mild at the beginning, only building up a head of steam over several months. Corrections, in contrast, tend to be far sharper and more precipitous.
1. For what it's worth, I tend to agree with this position in that the fundamentals of the US economy are strong and improving, although contrary data can be cited. The conditions that would need to be in place for a bear market don't appear to be on the horizon yet, since "money" is flowing into the economy through both deficit spending, liberal bank lending, as well as wage increases. 

One would think that the concern might be inflationary pressure, both inflation is still moderate. Positive data about the US economy is resulting in the Fed increasing the policy rate as a part of its reaction function, in addition to normalizing after having employed special operations to address the crisis. Both of increasing the policy rate and selling government securities from inventory have a stimulative effect, which is something that the "pros" don't seem to realize since they don't understand MMT and MMT based financial analysis. Markets seem to have concluded that the Fed is "taking away the punchbowl" and are pouting by sending a signal by increasing liquidity preference and reducing risk. Crowd behavior takes over from there in an atmosphere of uncertainty and increasing fear that trumps greed.

2. On the other hand, the world situation looks poor and declining, suggesting that this pullback could mark the second leg down in the ongoing global financial crisis, since underlying issues were not addressed. Or, the world could even be headed toward war, at least a trade war along with wider sanctions that would apply even to second-parties as a matter of economic warfare against perceived adversaries and competitors of the US. Anyway, dark thoughts and dire predictions are rife, stoking fear and uncertainty.

I don't want to minimize the threat that the world is presently under, but am simply pointing out that given the facts, the discounting seems to be excessive. But given the volatility of the geopolitical situation, things could change quickly in unforeseen ways. That is a reason for the high level of uncertainty that is sparking fear. Taking this into account is not being irrational. But overreacting to it is somewhat irrational in the sense of negative emotion overshadowing reason and data.

Conclusion: It looks to me like the markets are excessively discounting the latter scenarios, owing to the fear resulting from uncertainty about the future of the world economy, while seeming to ignore the positivity regarding the American economy that the former indicates based on empirics. Markets have shrugged off this sort of thing previously but are not doing so now. There are two sides to every trade, and only time will tell who is right.

Mark Hulbert: This still looks like just a stock-market correction, not something worse

No comments: