The less Magnificent 7
Last December in Bear Market Watch, I made the case that the conditions were ripe for a bear market in stocks. It’s time to upgrade our financial storm watch to a warning.
Here I stretch the weather forecasting analogy a bit, because despite today’s market drama, there has been no actual, proven, bear sighting. On the other hand, if we waited until there was, that would mean large losses had already taken place, making it a mere historical observation. Thanks, but no thanks … that’s what Wall Street media do when they say things like stocks “have entered” a bear market. By their simplistic definition, they say this when they’re already 20% down. But that would mean the bear market actually started 20% ago. If that’s a sell signal, it’s a pretty damn useless one.
So technically this is still in the watch category. Yet it merits some kind of upgrade, as the case has grown notably more convincing. But first, I have to admit that any such bear market could not have begun on December 6 (on an intraday basis) or December 9 (on a closing basis) as previously hypothesized. Those highs were taken out in February. The intervening low occurred January 10, so the “bear market” was just over one month long. That’s not long enough to qualify as a bear market in the Financology lexicon. So if a bear market is currently in progress, it began at the February top, on a closing basis February 18. Using the world equity index fund VT as a proxy for the asset class as a whole, that would mean the market is down 6.19% from the highs. Not a bear market according to financial media lite’s magnitude measure, and still not one by our time duration definition either. Yet.
What’s more, the odds of a sharp rally beginning as soon as tomorrow are high. That far from negates a larger bear market trend, but the market is oversold on a short term basis, sentiment is bearish, and if it is in a bear market, it wants to rally soon before resuming its larger trend.
The bear market case rests on the observation that the joint bubble in the most speculative areas, the Mag 7 and crypto markets, has sprung a leak, but still has plenty of hot air within, waiting to get out. These are the overhyped tech stocks, actual and virtual, in most dire need of deflating.
Yet today’s action was really more about a big rally. The US dollar. When everything looks like it’s moving in the same direction, check your units. There’s no hidden fundamental reason for or conspiracy among such disparate assets as gold and tech stocks, or US stocks, XS stocks, gold, copper and oil to all react the same to the media’s whipping boy du jour, the Trump tariffs. The one thing they have in common isn’t even intrinsic to them, but our habit of pricing them in the same unit, dollars. The dollar rose in value, so it took fewer of them to buy the same stuff.
That is, prices fell. If you were hoping for a taste of relief from the trend of dollar depreciation known as “inflation”, this is a process to celebrate.
Yet the bear case is far from closed. We’re in a period of notable seasonal weakness, that is, selloffs this time of year are common. And rebound rallies as well. On the other hand, as mentioned above, the culprits of hype remain in bubble territory, so there is more work to be done.
Another factor is that there is one notable exception to the selloff, Treasurys, their rise suggesting that markets can envision yet better days ahead for the dollar. And finally, we have the Kalecki Identity. This accounting identity closely links corporate profits to government deficits. To the extent the new administration is able to rein in deficits, it will also rein in corporate profits.
A stock market bubble, an exploding wealth gap, and a looming government debt crisis are the hangover of bingeing on economic dope, and you have to detox to recover.
It remains to be proven whether this is indeed a bear market. That will come if and when the anticipated rebound rally falls short of the February top before turning lower again. Stay tuned…
The reasoning behind the conclusion that a broad decline in asset prices means currencies rose in value is explained in depth in The Claw Machine. The short version is that on a day like today, when investment assets lost trillions in value, the total purchasing power of investment assets plus currencies didn’t change. The total body of goods and services available for purchase in the world today is virtually the same as yesterday, so total purchasing power must be too.
Of course it takes a little time for the adjustment to filter through the pricing chain, by which time asset prices will have moved again, but the cumulative effect doesn’t just disappear. If asset prices remain lower, it’s an offset to be reflected in consumer prices in due course. In short, inflation, both positive and negative, is apparent in asset markets first, consumer prices and wages later.
Mega’s dispatch from England:- The oncoming Storm
Still left breathless, blow after blow…….we watched Ukraine war get turned from a Proxy war against Russia…..to one were the tables have been turned…..its now a Proxy war on Europe/City of London BY Russia/USA.
Here in Limey-ville we just been informed that Taxes are going up (yet again) & major cuts in spending are coming. Normally they only talk about cuts, this time they HAVE to make them.
The days of “Buying votes” is over.
I recall my Late Father who was forced into the RAF to do his national service. Dad was shipped out to Germany & worked on an airbase. There were a number of locals working on the base. One guy was ex Luftwaffe & Dad asked him about what it was like towards the end of the war?
“We knew by 44 it was over, just a question of time”.
“It was a strange time as we knew the Nazi were finished as they became more & more hateful of the people”.
………..the same thing is happening here
Mike
Just to air a pet peeve about media coverage … words like “Ukraine” and “Russia” are shorthand that need to be read with care. What for instance exactly is “Ukraine”? Lines on a map? The regime in Kiev? Or the 33 million people that live there?
Media toss around such words as if there were no distinction. When they speak of defending “Ukraine”, do they mean the actual people of Ukraine, or the regime in Kiev?
Doesn’t it matter? The political meaning usually refers to the regime. But the rhetoric often implies it is the people that are being defended. For the those living in the east, the war just boils down to whether they are ruled by autocrats in Kiev or autocrats in Moscow. As for defense, all indications are many there were under attack before Russian troops massed on the border.
Whatever else we may think, it’s important to understand exactly what we mean when we say “Ukraine”.
Same with other countries. It’s usually governments that go to war. As far as I know, despite the state of war, the American people have no quarrel with the Russian people. Maybe the only new development is governments growing more closely aligned with the people.
Stocks are down again so far today. The character of the declines is distinctly different than yesterday’s, however. It is not a dollar thing. Commodities, notably both copper and gold, are up sharply. This means stock declines are larger in real money than in dollars.
Stock market internals are different too, with supercaps outperforming the rank and file. In dollar terms, that just means down less; the Nasdaq is down less than the Dow. The disembodied tech stock known as bitcoin was at last check actually higher. So in a reversal of yesterday’s motif, the more speculative assets are being pummeled less.
Wow did that change fast. Not only is Nasdaq now positive but VT – the world – appears poised to replicate the feat. The rally I mentioned in the post may actually be under way. In which case there is a dollar story too … a weaker one.
At the end of the day, the rally failed. Not a bullish omen.
Stocks finished -0.40%, treasuries -0.26%, copper +2.82%, gold +1.18%. Let’s see how the week closes. For now, my working hypothesis is that there is a rebound rally from a seasonal March low, but that that rally reverses before eclipsing the February high. That would be the penultimate confirmation of a bear market, the final being a further low below the March low.
We now have the close for the week. From last week’s close, stocks finished -1.57%, treasuries +0.04%, copper +3.32%, gold +2.51%.
The week’s low for stocks was posted yesterday, March 13. Sticking my neck out, I suspect this was the seasonal low and the end of the February-March leg down. Yesterday’s low was a lower low – taking out the January low – so today’s rally does not negate the bear market hypothesis.
Mega’s dispatch from England:- The Cold wet reality slaps them in the face.
For all the shouting it looks like Russia has all but won in Ukraine. The West is looking for some sort “we won on points”. Russia has made it 100% clear what is required for peace. If it is not agreed then Russia will bring down the hammer.
As well state of the art weapons that are 2 gens ahead of what the WEST has, Russia now has a battle trained armed forces. Russia also has 14 division being trained & equipped…..almost ready to go. If the West tries to force a “Ceasefire” or “Pause” to fighting while they “Talk” ……Russia will finish the job!
So, am told by an old friend who still working in the Home Office that behind the curtain big moves are underway. A Post US Sugar Daddy world.
Every single Labour MP is being brought into Downing st to meet the Prime minster & team to have the BAD news told to them. I short MASSIVE cuts in public spending, buying votes IS going to stop.
Thousands of Government jobs are getting cut, factor in the Blood bath that is now happening in private sector & much, much more to come. I discovered that “Mobility” that wonderful British car charity that is suppose to hand out FREE cars to poor ill people whom desperately require a car to move around has once again.
Am sure our American cousins will be “Delighted” to know that almost 1 million Brits get a FREE car (Running costs as well) while back in the USA they fund this with poor healthcare & high taxes.
Change IS coming
Mike
Thanks for the view across the pond, Mike.
It was a war that never should have happened, like some others in recent decades. The outcome is whether a smallish population of eastern Ukraine will be ruled by autocrats in Moscow instead of autocrats in Kiev. That was never worth a world war or risk of nuclear war.
The rest is about whether NATO would expand into another former Warsaw Pact country; the world domination game of Risk, an obsession of the elite but meaningless to the average citizen. That was still less worth a world war or risk of nuclear war.
Uncle Sugar
I’ve long argued that the US stock market, especially the big names like the Mag 7, is overvalued and that the less hyped stocks could outperform and XS (ex-US or rest-of-the-world) markets could potentially beat the US. Well, it looks like we’re getting a taste of that. The Dow has been outperforming the Nasdaq and XS markets have been doing better than the US markets recently, the chart showing ETF proxies for the US and XS, VTI & VXUS.
Striking that for all the US media hand wringing about a correction in stocks, the rest of the world market has been doing fine.
The US CPI was released this morning, and while still a problem for millions of struggling Americans, and above the Fed’s stated target, was a bit lower than market expectations, at 2.8% year over year,
Contrary to some simplistic media analysis, gold does not rise and fall with official inflation stats. The latter are chronically late and by the time they’re on the case gold has already moved. Weaker official stats mean that at the margin, the Fed will run easier monetary policy. This is bullish for gold prices.
This morning PPI also came in a bit lighter than (questionable) “expectations”. Again, some media continue to be ignorant of the relationship between official inflation stats and gold prices, yet blab on about it anyway:
Gold continues to rally to all-time highs even as U.S. producer prices cool in February
“NEW YORK (March 13) Easing inflation fears continue to have little impact on gold, as investors still view the precious metal as an important safe-haven asset to hedge against growing economic uncertainty.”
Looks to me like Reuters is more interested in promoting an “economic uncertainty” narrative (a thinly veiled anti-Trump agenda?) – than in shedding any light on what’s driving gold prices.
Again, it makes perfect sense for softer official inflation data to be bullish for gold, as it implies easier Fed policy ahead. Gold moves when the inflation is happening, official stats much later. Recall in 2020 when the Fed launched its multi-trillion-dollar monetary bazooka. Gold prices soared immediately; CPI didn’t start taking off for another year or so. Then when CPI was making headlines in 2022 gold prices softened as the Fed responded.
Now ostensibly softer than expected CPI & PPI are being greeted by gold prices making new all time highs.
………………& you thought i was joking
https://www.telegraph.co.uk/business/2025/03/13/state-funded-bmws-epitomise-britains-dysfunctional-welfare/
If you want a brand new BMW i4 M Sport, you have two choices. The first is to lay out the full £52,770. The second is to tell the DWP that your mental health makes it hard to leave the house, claim the enhanced mobility rate of the Personal Independence Payment (Pip), fork out a down payment of £7,999, and get the Government to lease it for you.
In exchange for the mobility component of your benefit, you’ll get a new BMW every three years, your insurance and accident breakdown paid for, your servicing and tyre replacements covered, and your choice of “conventional metallic paint option”.
The only catch is eligibility, but thanks to the soaring growth in sickness benefits claims, that’s less of a barrier than it used to be.
The number of people who could potentially claim a Motability vehicle has risen by over half a million since 2019, and the organisation now has 800,000 clients. The result is a bizarre behemoth: a car-leasing programme for the disabled that accounts for roughly one in every five new cars sold in Britain, and is one of the country’s largest issuers of corporate debt.
It’s true that the system could probably be tightened up. Dig into the data, and among those claiming Pip are 23 people with “factitious disorder”: a condition whereby otherwise healthy people fake illnesses. To put it another way, people who want to be sick, but aren’t sick, are categorised as sick and therefore receive sickness benefits. Some 14 of them paid the enhanced mobility award necessary to access a state-funded BMW.
Another 16 people have managed to claim Pip for acne. Five were awarded the higher mobility rate. Some outcomes are less amusing: people attempting to claim for asbestosis are less likely to win an award than those claiming to have autism (around 59pc of whom are eligible for Motability).
“It remains to be proven whether this is indeed a bear market. That will come if and when the anticipated rebound rally falls short of the February top before turning lower again.”
Just in case you haven’t been following, the market has passed this test with flying colors.
Bear market confirmed.