This is what Bear Markets feel like. We’ve forgotten because it’s been so long. Market corrections are healthy but not fun. They usually last a few weeks or perhaps a month, but it’s a cleansing process to get rid of the excess price and enthusiasm. For this 9-year secular Bull Market run, which began in the ashes of the Financial Crisis, we’ve seen a number of corrections. 2011 was really a Bear Market because the S&P 500 did fall 20% from its peak, but it was not a closing low, which means it was recorded only down 19%. Only down 19%… It was a cyclical Bear Market. And so is today. We’ve been convinced.
Bear Markets are characterized by sharp sell-offs and usually end in economic recession. Bear Markets come with the territory. They have historically been triggered by large interest rate hikes from the Federal Reserve and last on average about a year. The rate hikes are supposed to cool things down economically and prevent overheating. But they often go too far. That’s why those on trading desks have long said, “Bull Markets don’t die of old age. They get murdered by the Fed.” There’s a growing group that thinks the Fed is murdering this current Bull. President Trump is the loudest voice here. That should come as no surprise.
The Fed is still expected to raise interest rates again before year’s end, but the probabilities have declined and expectations have completely shrunk for the new year. Is the Fed feeling pressure from the critics? Maybe. But hopefully not. More likely, the Fed led by Jerome Powell is paying close attention to cooling economic growth and the turbulent financial markets. November’s job report released today was the freshest piece of evidence of slowing. We actually believe Powell is doing an admirable job in a no-win situation. But we think a December rate hike should be it, and then time for reassessment. If the Fed doesn’t raise in December as expected, it would probably spook the Market even more, suggesting things are worse than thought.
Bear Markets are brutal. The selling is relentless. But it’s important to understand that rallies do occur within. Bear Market rallies are some of the most powerful, as the gains can be as ferocious as the losses. Just when you thought stocks couldn’t go lower, they do. And when you find yourself not able to take it anymore a sharp reversal occurs with an explosive rally higher. It moves lightning fast. In the last 3 weeks, there was a sharp Thanksgiving sell-off followed by explosive gains last week which were completely erased again this week. Yesterday alone had a month’s worth of price action all within six and a half hours’ time. It happened again Friday, with an early rally that was soon erased and selling accelerated towards the close. This is not normal price action for December. This is normally the strongest month for stocks. Tuesday’s 3% sell-off was a rarity for December. Since the 1950’s there have been just three other years with a 3% down day in December. It happened in 1987, 2000 and 2008. Concerning, as each of them were notable bad years. But each one of those 3% down days (like we experienced on Tuesday) was at or near the low for December and was followed by a rally into year-end and early January. We do think another rally attempt occurs into year end. We plan to sell it. We’ve been selling a lot the last 10 weeks. We play defense in Bear Markets. It has only been recently that the Bond Market has been our friend. It has provided safety, something that was not the case for the balance of the year. There really hasn’t been anywhere to hide for investors in 2018.
The Market was closed on Wednesday in honor of our 41st President. The closure certainly played a role for increased volatility. Year-end trading got squeezed by a day. But it happened for the right reason. It was a day of mourning and celebration of the life of a great American. George Herbert Walker Bush dedicated his life to service for our nation. It began at age 18, where Bush was one of the youngest fighter pilots in World War II. Bush was a member of the House of Representatives, Director of the CIA, Ambassador to the United Nations, and Vice President under Ronald Reagan. He presided over a pivotal time in global history with the fall of the Berlin wall and the demise of the Soviet Union. He was the first post-Cold War President. Bush Sr. was also the last President to preside over four consecutive quarters of 4%+ GDP growth. The economy grew 4% in Q2 this year. But these days feel so different from the days of 41. Today’s normal doesn’t feel normal.
We are always looking to history for comparison. Cycles tend to repeat. Our 41st President faced something we believe has some similarities to today. But his response would never be done today. President Bush inherited an economy that was healthy. GDP was growing nearly 4%. But it was slowing. Same goes for today. President Bush was known for some strong words upon entering the White House. He boldly said: “Read my lips, no new taxes.”
These words ended up biting him in the rear and probably sealed his one-term status. He switched gears when the economy was teetering and ended up raising taxes in 1990. That year saw a sharp sell-off, effectively a cyclical Bear Market. The US Economy came to a near halt, growing just 0.6%, experiencing a mild recession along the way. It also set up one of the most powerful Market cycles in decades. But Bush got roasted. He knew he would. These words were used against him at every angle in the 1992 election, which he lost to Bill Clinton. It has been said that President George Herbert Walker Bush was able to come to terms with his decision to raise taxes, even though it cost him a second term because he was always about helping the country. He was quoted saying: “When the really tough choices come, it’s the country, not me. It’s not about Democrats or Republicans, it’s for our country that I fought for.”
History is shining brightly on this great American. He is being referred to as the greatest one-term President in our history. Few people thought that then. But when you are fixated by short-term issues, it’s easy to lose sight of long-term decisions, actions and results. Leadership is about making tough decisions, especially when it’s not popular. President George Herbert Walker Bush is proof of this. Bear Markets are a shorter-term necessity for financial markets. We’re dealing with it defensively and we will all get through it, even though the process can be gut-wrenching.
Have a nice weekend. We’ll be back, dark and early on Monday.