Our last post, Overdue, but not Overdone, asserted that the bear market in stocks had come out of hibernation and that there was considerably more mauling ahead. Since then, stocks have performed as expected, selling off sharply. So is that it? Or is this leg down just getting rolling?
This morning’s Synthetic Systems update says the latter. In the upcoming third quarter, Synthetic Systems expects markets to reprise their first quarter act, with stocks declining and bonds and gold rallying. Interestingly enough, this outlook is not all that different than the 2020 Q3 forecast Systems made in last quarter’s update, and even the forecast at the beginning of the year.
In the second quarter now drawing to a close, markets unsurprisingly rebounded from the extremes seen in late March. Stocks were deeply oversold at the lows in March 23. What was not so expected was the length and strength of the rebound rally. Even in the second half of May and into June, as the economy resumed its deterioration, stocks continued to soar as enthusiastic dip-buyers overstayed their welcome and market pundits everywhere either tried to rationalize the rally or gasped in disbelief. I believe the disbelievers will have the last laugh. Synthetic Systems is looking for a low in stocks around the end of September.
In the spirit of a picture is worth a thousand words, rather than run on with more prose, at this point I’ll simply defer to the picture Synthetic Systems paints. As always, Synthetic Systems forecasts are posted on the Market Analysis page. Just click the link for the Quarterly Charts on the following page:
the equity markets are in denial, supported by huge flows of dollars- income support, ppp loans, unemployment benefits jacked up enough so that many “earn” more being unemployed than they did when they were working. but these programs are ending even as the fed has started slowly contracting its balance sheet. it’s hard to picture washington agreeing on the next stimulus bill, even as the election approaches. and the fed tends to be reactive, not proactive, so it will take some turmoil before they sprinkle money on the population and markets again.
the bond market has been in disagreement with the stock market. the bond market sees bad times ahead.
in general the bond market is much smarter than the stock market.
Good take, JK. Markets have a tendency to do what they ‘ought’ to, albeit not necessarily when we think they ought. This is captured in the saying that in the short run markets are a voting machine; in the long run they’re a weighing machine.
That said, I think the weighing will come sooner rather than later. Aside from stocks already being in a process of retreating from an overbought extreme, it also happens that the Fed has quietly been allowing its balance sheet to shrink a bit:
https://www.federalreserve.gov/releases/h41/
We can get some additional perspective by asking just how much stocks have actually risen, versus how much the currency has declined. There’s no unique answer to this, but we can get some idea by pricing stocks in other units. In particular gold has performed roughly in line with stocks in recent weeks, indicating that stocks have done little on their own, having been in a trading range in gold terms and still well in negative territory on the year.
While the Fed has certainly been able to get stock prices up, it hasn’t done anything to improve their value. Earnings are down, so that even at the same prices as they were prior to the February-March declines they offer less value for the money. The Fed has done nothing increase the dividends corporations pay. So for each dollar you pay, you get less than before. By inflating prices, the Fed has only made stocks a poorer value.