The 2018 stock market crash is now afait accompli, having taken a polarbearplunge that put ice in the veins of the Fed and electrified their collective spine with such a deep chill they ran like a fat walrus from the bear market to halt their long-nurtured plans of economic tightening. With that event fulfilled, I’m now predicting a 2019 recession as the major economic news for this year (both US and global).
To confirm my bearish claim on the market’s crash:
Several leading stock market indexes around the globe endured bear market declines in 2018. In the U.S. in December, the small cap Russell 2000 Index (RUT) bottomed out 27.2% below its prior high. The widely-followed U.S. large cap barometer, the S&P 500 Index (SPX), just missed entering bear market territory, halting its decline 19.8% below its high.
But the Dow fell completely into bear territory and the NASDAQ even further into the bear’s territory. Even the S&P hit an intraday low that was 20% down, so it’s stop right at the edge by the end of the day is nothing but a rounding error.
In terms of real cost, anyone who scoffed at my 2018 warnings and held their stocks through 2018 is still recovering from his or her losses. That we have only just this week recovered those losses is quite easily proven with one simple graph of 2018 where the breakdown begins in January where I said it would and hits full crash velocity in the fall:
And, technically, we’re still in the bear market, as we’ve recovered to the point where the market broke all to pieces in January 2018 but not to the point from which the bear market began.
If you like wild financial roller coaster rides that end right back where you started, stocks were the place to be in 2018. Obviously, it was an extremely bumpy ride to worse than nowhere for those who bought and held in the market thoughout 2018. The year was, however, a completely pleasant financial ride for those who were in cash all year, which was the only major asset that performed positive for the year! (And, of course, if you are the rare prodigy who can accurately time every peak and every trough, years of high volatility can make you more money than a steady climb; but then you are a very rare bird with a very high tolerance for risk — some would say a fantasy.)
I can attest to the calm because that is where I sat out the turbulence, being someone who doesn’t prefer bumpy rides to worse than nowhere. Moreover, those who jumped out at January’s peak, as I did, and remained out of stocks for the rest of the year, could also have experienced a joy ride of pure gains over the past three months in the stock market, instead of waisting the whole rally on mere loss recovery.
Now the losses are finally made up, and so reported here, but that doesn’t diminish the risk of a 2019 recession. On the contrary, US stock market crashes usually correspond with a recession,but often happen before or after the recession:
In the US, most analysts agree thatbear markets and domestic recessions have generally been fairly closely related, though the exact leads and lags between the two may differ considerably across cycles.Furthermore, there have been several bear markets, notably in 1987 and 1978, that have not been accompanied by recessions, and vice versa.
That is not to say the stock market will make it back up to its record summit ( or not go deeper into its polar region than in December; but, whether it does or not, a 2019 recession is in the making.
What will spark the next bear market? An economic recession, or the anticipation of one by investors, is a classic trigger, but not always.Another trigger has been a sharp slowdown in corporate profit growth, as we are seeing now….Stock market pundits are widely divided about the nature of the next bear. For example, Stephen Suttmeier, the chief equity technical strategist at Bank of America Merrill Lynch, has said he sees a “garden-variety bear market” that will last only six months, and not go much beyond a 20% dip, per CNBC. At the other end of the spectrum, hedge fund manager and market analyst John Hussman has been calling for a cataclysmic 60% rout.
Whatever continues to play out in the stock market, the main economy now steps into the forefront of the picture for me. The stock market’s 2018 trip on thePolar Bear Expressalready did its damage to investor confidence andpushedfleeing money into bonds, bringing long-term bond interest down, even as the Fed was dumping bonds, which should, otherwise, have pushed interest up. (After all, the Fed bought bonds in the first place to lower long-term interest.) That changed the bond market significantly enough to decisively align with recessionary sentiment in a historic bond inversion. Andthatmakes 2018’s bear market a game changer.
Whilebond-market inversionhas never failed at predicting a recession in the last half century, that is not, by any means, the only reason I’m predicting a 2019 recession, which I did before the full inversion. I laid out in myfirst Premium Postthe numerous headwinds that would likely assail the US and global economies in 2019,regardless of anything that happens in stocks. So, my attention this year moves along to those things and to the likelihood of a 2019 recession hitting around summertime (as noted before not to be officially declared until half a year after that because that is just a fact of how recessions are declared — always more than half a year after they start as we wait for the stats to come in).
We may well see a second crash in US stocks because of this year’s recession, but whether we do or not is irrelevant now that we havealreadytaken a trip with the bear. Another game-changing result of that excursion into the polar regions that happened because of the Federal Reserve’s Great Rewind is that it proved to everyone the Fed cannot do what it has always said it could (and I always said itcouldn’t), which was to reduce its balance sheet and return to normal interest targets after building a fake (as in unsustainable) recovery. Therefore, confidence in the Fed is also badly shaken, leaving it weaker in its ability to lift us out of a 2019 recession than its bloated balance sheet and already-low interest rates leave it. At this time, the Fed’s moves are just following the market’s dictates. The Fed is now the market’s bitch in nearly everyone’s eyes.
Moreover, the Fed’s damage to the economy is still coming in. I’ve noted before that there is typically a half-year lag between any major Fed action and where the economy goes; yet, the Fed is continuing to reduce its balance sheet by the same amount this month and next, cutting that by half in June but not stopping until the end of summer. That means there will be half a year of lagging resultsafter this summer,even as the Fed’s actions from this past winter are still playing out into this summer. With the Fed continuing to let more hot air out of the balloon until the end of summer, things certainly aren’t going to get more buoyant. So, there is plenty of downdraft still to carry through the general economy all the way to the end of this year as a result of the Fed’s recent and continuing actions.
My past statements about the next major economic downturn have always said the Great Recession will return like the undead because the Fed will go too far in sucking liquidity out of the economy. I believe the Fed has already done that, but the results of that withdrawal will take time to become fully realized. That’s why PresidentTrumpand histwo stooges of financeare begging the Fed to go back to QE “immediately” because, if they wait until it is obviously necessary, it will be WAY too late!
You see, any results from the Fed jumping back into full economic-stimulus mode — if the Fed does as the Trump administration demands and as most financial analysts and investors now appear to expect — will also take time to be realized … other than in stocks and bonds. Moreover, any results they do get will have diminished returns at best. At worst, new Fed stimulus will now have an opposite effect if people are smart enough to realize it all means we are right back where we started and that Fed money–printing must now go onad nauseam. So, the Fed has done its damage (which it really did by the recovery path it chose), and the bond market knows it. For stocks, as I laid out in that first Premium Post, this will be a year of turmoil whether stocks are generally up or down.
Now on to the talking points throughout the past week’s news that show we are, as I’ve claimed, goose-stepping our way into a 2019 recession as metrically as the ticking of a coo coo clock:
Tick tock goes the clock, counting down to a 2019 recession
The U.S. private sector added 129,000jobsin March, the weakest reading in 18 months and below consensus expectations of 165,000, according to an Econoday economists survey. The report is watched for clues to official labor data due Friday.
New hirings around 120k or less are usually recessionary.
Followinglast month’s weak ADP printwhich front-ran the dismal “must be an outlier due to weather, shutdown, or anything else” payrolls data, expectations were for a slightly weaker ADP employment headline in March. However … ADP disappointed, adding just 129k jobs in March (well below the expected +175k…. This is the weakest growth in employment since Sept 2017.
Since the job reports are all over the place, it’s hard to know who to believe — the ADP or the government’s Bureau of Lying Statistics. You may recall that February’s jobs came in at an extremely disappointing 20k, which the BLS just revised upward to an almost equally disappointing 33k. To sort out the messy disagreement in job statistics, consider the following for the BLS’s more optimistic numbers:If you average all three months of the first quarter,2019 is down from 2018’s average for the first quarter by a fairly significant 40,000 jobs per month. Annualized, that would be the lowest level in almost five years! So, even the better BLS numbers are not the numbers you want to see if you believe the Trump Tax Cuts and government hyperspending — now in effect for more than a year — are taking the economy upward! Kocain Kudlow must have lasting damage from his old habit in order to call this a strong economy,even as he begs for more immediate Fed assistance.No wonder he’s begging!
Meanwhile 2019’s rise incontinuingjobless claims is the worst we’ve seen since the start of the Great Recession!
The overall unemployment rate just started trending back up as well:
Those little upticks at the end of each graph may seem insignificant,butthey are actually highly significant because the first uptick in unemployment downtrends from a low bottomalwaysimmediately precedes a recession:
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