As my friend, Ken Woodruff often says, There are two seasons in Iowa and places north. Winter and tough sledding. The groundhog saw his shadow, but there is an end soon coming to physical winter. The current bear market, not so soon. More tough sledding, until the fourth quarter would be my prediction.
Some of us had been discussing that many ratios such as Price to Earnings were still too high for the bear market to be ending now. I was somewhat surprised at the strength of the uptrend in January. While I don’t like downtrends any more than anyone else, it is encouraging when your reading of technical indicators is shown to be correct. This is still a bear market.
At this point, the Dow 30 Industrials are down by 1.27 percent and the S&P 500 has fallen back to a gain of less than 4 percent, from its Groundhog Day high of almost 9. The Nasdaq 100 (QQQ) is still up over 10 percent year to date (yesterday, Tuesday morning), but it had lost 33 percent last year. Contrarily, short term US debt is paying now over 5 percent.
Last week in Orlando, I got to hear my favorite economist and a couple of well respected stock market experts in person at the Kingdom Advisors annual conference.
(For those of you who may be jealous, once I went into the hotel, I did not come out until time to leave. It was over 90 degrees with the usual humidity–too hot for my preferences!)
Brian Wesbury of First Trust Advisors led off with an apt analogy. He said our economy is coming off a morphine high provided to us by the magical creation of trillions of dollars of liquidity to save us all from effects of Covid-19 shutdowns. As such, we are still anesthetized and running on momentum.
But with an inverted interest rate yield curve (short term interest much higher than 20 to 30 year rates), the Federal Reserve Board getting serious about inflation too late, after it was so well expected and documented, and the Fed attacking inflation with the wrong tool—interest rates—not the money supply (M-2), he said the actual recession is still to come, but on its way.
Technically, we had a recession last year, if you define it as zero growth of Gross Domestic Product (GDP) for two quarters. But it was so mild and had little effect that it did not turn into the usual amount of pain. Mr. Market apparently thought the Fed Chair was signaling rates were about high enough to quit raising the Federal Funds rate. That is the one lever by which the Governors swear.
The problem is that absolutely no banks are at the door of the Federal Reserve Bank to borrow any money because they are all still awash with M-2 of their own. Meanwhile, the Fed has gone from a fat balance sheet of reserves to a dwindling amount of its own capital.
In other words, the longer term government bonds it holds have and are dropping in value as short term rates rise. Our Central Bank may become technically bankrupt. How is that for the wisdom of the thousands of Ph.D Economists who tell us they know what they are doing?
What is the good news? To me, it is that there is still no giant supply of labor on the sidelines begging to go to work. The pain of recession is generally felt first and most by working class tradesman and laborers having lost their jobs. Despite the software engineers being laid off (who have made tons of money of late and had better have saved some of it), the people who produce and bring us our necessities are still in short supply.
As usual, only time will tell. But if someone tells you he or she is from the government and they are here to help you, be very, very skeptical. They often know not what they do.
(Statistics from Worden Brothers, Inc., TC2000 software, 2023.)