The U.S. Central Bank spent most of the first half of August furiously messaging markets that any dovish interpretation of their recent (July 27) FOMC meeting would be a MIS-interpretation. For the first half of August, investors didn’t seem to care what the Fed was messaging – the June-July rally marched onward and upward. Then, on a sleepy August Friday morning, at the Jackson Hole Economic Symposium, Fed Chair Jerome Powell basically repeated, in an 8-min prepared speech, what he and his associates at the Fed had been messaging all month. And for some unknown reason, on that day, markets decided to listen, and it was suddenly clear that the Fed would continue to combat inflation, even if it meant more pain for consumers and businesses. Risk-off was on. The S&P 500 Index declined -3.4% on that Jackson Hole day and down -7% in the ensuing week.
Over half the gains achieved in the June-August rally have now been taken back by the bear market. Our summer rally appears to be the bear-market-rally kind although that will not be official until new lows are put in on the S&P 500 Index – now about -7% away.
Let’s imagine for a moment that this summer’s rally is a bear market rally and new lows are put in place in the coming weeks. What then? I don’t know, no one does, but for the moment I am looking at it this way. We have just experienced the worst stock and bond performance in over 50yrs. Are we in the worst bubble of inflated valuations in over 50yrs? Are we near the worst liquidity crisis with market function at risk in over 50yrs? Are we about to experience the strongest recession of economic growth in over 50 years? To me, the answer to all these questions is no. If so, then significantly more downside to the markets may be limited below the June lows -7% away from current prices.
However, valuation is only one dimension of market performance. There is also time. And I suspect that while markets have somewhat expeditiously discounted out much of the excess that global central banks have pumped into markets the past few years, it may be that not enough time has passed for a market recovery to begin. If you were asked, which will come first a new high or new low for markets over the next few years – you might answer neither.
Be well,
Mike