With the market plunging nearly 500 points Tuesday, people are getting nervous again. Was last week’s recovery just a fluke? Early trading Wednesday has given only the most modest of bounces, it seems like everyone is now waiting for the next shoe to drop.
While we’ve predicted the current volatility would persist for awhile, it’s time to take a look at the broader question everyone now seems to be asking: Are we entering a new bear market driven by a deflationary commodity collapse in markets such as China, Russia, Canada, and Brazil?
A bear market, commonly defined as a 20% decline in a stock index off a recent high, would break the 6-year bull market we’ve had going since March 2009. In 2011, the market fell roughly 19% just about breaking the bull market, but shares recovered and the rally continued.
Since then, there haven’t been any severe drops that threatened to send us into a “new bear market”. Many pundits are saying this market breakdown may be the one that finally breaks the bull’s back. The stock market, as judged on an S&P 500 basis, peaked at 2134 and fell as low as 1820 in the recent decline, a 15% drop off the top.
With the recovery late last week the S&P rallied back up to 1950, which many took to mean the market was back into the all-clear zone. But now we have this week’s renewed selling. The possibility of dropping through 1820 and down toward 1700, which would trigger a new bear market, is back on the table.
The bear’s argument is that the market faces new problems, and that this correction will be different, so to speak. The previous corrections in this bull market have been driven by fairly insignificant factors.
Fretting about Greece (various times), political games about the debt ceiling, last year’s Ebola outbreak, these were the sorts of concerns that have previously caused investors to dump stocks.
But now, the bears argue, we have meaningful risks to the US economy in play. Most notably that emerging economies have largely stopped growing. China, the 1,000 pound gorilla, is in a notable slowdown, and the other BRICS (with the exception of India) are in contraction.
The collapse in commodity prices is spreading farther and farther. Now it’s moved beyond the emerging markets, and taking down other large developed economies. Plunges in Brazil and Russia are one thing, but the deflationary rot is spreading to more advanced economies.
Australia announced another disappointing GDP figure last night, the fifth consecutive quarter of slowing growth. The Aussie Dollar dove following the headline, falling under the .70 level to a US dollar, trading back to March 2009 levels. In Aussie terms, the current economic crisis has already taken 30% off the value of their currency, everything they recuperated in the post-2008 financial crisis recovery.
Canada, similarly, is deep in the throes of economic problems, with a collapsing housing bubble, a shrinking economy, and a currency that’s hit multi-decade lows. Even in 2008, things never looked as bleak for Canada as they do now.
The US’ southern neighbor, Mexico, finds itself with a stagnant economy, and its currency at all-time lows. As the US’ third largest trading partner, that inevitably hurts earnings for a large swath of the US multinationals.
Since the US trades primarily with countries like Mexico, Canada, and China, all of which are facing severe economic headwinds, the bears argue the US bull market will be felled. How can large US companies keep growing sales if all their international markets are sputtering?
This argument has merit, but it’s far from a foregone conclusion that the bull market is ending. Much of the global slowdown has been driven by the Fed’s policies that have driven to the dollar to the moon and collapsed the commodity markets. Any softening of the Fed’s current hawkish positions could revive the emerging and commodity-based markets.
As it has for awhile, the market hangs in the balance, awaiting further direction from the Fed. If they headstrongly insist on a rate hike in the wake of a steep global economic decline, stocks will likely take another push downward.
If the Fed relents, then hopefully the global deflationary bust story, highlighted by pictures of empty Chinese skyscrapers, can disappear from our memories as quickly as last year’s people wearing gas masks Ebola scared did.