The markets’ correction continues. The best performers, like tech stocks, have been become beaten-down dogs. Earnings are, and have been, great, but that hasn’t matter. The beating continue. In October, we had a string of 28 consecutive days without a single, back-to-back pair of up days – as long a stretch as any since the Great Depression. The average stock is now down 20% or more, which, for a broad array of stocks constitutes a bear market. The Relative Strength Index (a measure of velocity and magnitude) on the S&P 500 hit an astoundingly low level of 17.66 – a level so low it was never plumbed during the entire Financial Crisis of 2008.
Think about that last statement. During the entire panic of 2008, when the worldwide financial system was in danger of melting down, when the U.S. government took over Fannie Mae and Freddie Mac, when Lehman Brothers collapsed and Merrill Lynch was sold to Bank of America, when the US Federal Reserve lent AIG $85 billion to avoid bankruptcy, when U.S. Treasury Secretary Hank Paulson unveiled a $700 bil. rescue plan to purchase toxic assets, when Washington Mutual was seized by the FDIC and forcibly sold to J.P. Morgan, when the FDIC announces that Wachovia will be purchased by Citigroup.
In some significant ways the U. S. markets are reacting worse today than they did when all the events sited in the preceding paragraph were occurring in 2008.
And why? I can’t tell you.
Maybe it’s just a healthy, normal correction that happens in stock markets about once a year. We didn’t have one last year, so I’ve had two doozies so far this year. The third quarter earnings season just ended, and corporate earnings grew at the astonishing rate of 24%. Put that in context of a “normal,” good rate, historically, of 7 or 8%. Oh, yes, and the GDP of the US in the third quarter grew at 3.5% and the prior quarter grew at 4.2%. Do you also know that unemployment is at 3.7%, and weekly unemployment data tells us that things have not looked so good in 45 years. We have more open jobs than people to fill them.
Are there concerns? For sure, there always are and will be. This is a fallen world, after all. Trump lost the House. His opponents will try to destroy him and his growth-oriented economic program. Earnings cannot keep growing at the rate they have been growing. (But they are and can keep growing nicely.) Interest rates and inflation are moving up a teeny-tiny bit. The economies of the rest of the world are sick and getting sicker.
But do these negatives really, really warrant the kind of unremitting bloodbath we have seen since late September? Not to me, but then I don’t make the rules this or any other market plays by.
However, I would caution any of us on a couple of things. First, don’t cut and run. I think you will regret it. Second, in the short run, the stock market can be thoroughly irrational. Accept that. In the long run, it gets things right. What has brought on this market heart attack of sorts is beyond any financial doctor to explain. It just is. Try not to drive yourself crazy figuring it out. For more than 20 years my late wife was sick with a lethal number of medical problems. Doctors helped her, best they could. But much of her constellation of problems were beyond her doctors’ own understanding. Did that stop me from brooding over what was wrong, and what might I be able to do to help her? Hardly. It took a long time for me to realize that “this is the way it is.” For now, at least.
So, go about you day. Have lunch. Meet a friend. Go for a walk. But stop brooding about what we can’t understand in a structure – that is the stock market – that just behaves this way, like an angry teenager, from time to time.
God bless you all.