The stock market is currently experiencing a turbulent time. After a decline of 278 points last Friday, a rebound of 139 points on Monday was followed by a significant drop of 332 points on Tuesday and an additional 27 points on Wednesday. Fortunately, the markets rebounded yesterday as the DOW surged by 259 points, indicating a possible recovery.
Interestingly, signs of a strengthening economy are viewed unfavorably by the stock market. The selloff that initiated last Friday was instigated by the Bureau of Labor Statistics’ February jobs report, which indicated that 295,000 jobs were added during the month, thereby lowering the official unemployment rate to 5.5 percent.
Market speculators interpreted this positive economic news as a signal for the Federal Reserve to finally increase its federal funds rate from its near-zero level. As you may recall, this low rate has been maintained for over six years, coinciding with the anniversary of the current bull market, which celebrated its sixth birthday on Monday.
Increasing the federal funds rate will likely raise borrowing costs. Consequently, this may result in decreased credit utilization in the stock market. Given this perspective, the credit expansion that has contributed to the stock market’s growth over the past six years may soon be reaching its limit.
The mere anticipation of rate hikes by the Fed has already alarmed speculators, traders, and investors alike. Nobody wants to remain in a crowded theater when someone shouts “fire,” and everyone rushes for the exit. Nonetheless, Jim Cramer believes it might be premature to panic.
This Is Not 2008
“The market has recently undergone a remarkable run similar to what we witnessed before the great recession,” stated Jim Cramer on Tuesday. “Just a week ago, the Nasdaq (NASDAQ: .IXIC) was reaching new heights while stocks posted significant gains.
“The challenge arises because many U.S. companies operate internationally and will suffer from the stronger dollar. This situation will worsen if the Federal Reserve opts to raise rates.
“Earnings estimates for many multinational corporations could be slashed due to reduced exports stemming from a declining local currency overseas. Thus, stock values for these companies are likely to tumble.
“Moreover, these companies will also experience a negative impact on their profitability due to unfavorable exchange rates.
“With all these negatives at play, why am I not crying ‘fire’? One simple reason: we lack systemic risk. The market is not on the brink of collapse.”
“Let’s remember that consumer sentiment remains robust, and the banking sector is well-capitalized,” he added. “This is not 2008.”
Bet Against the House at Your Peril
“History doesn’t repeat itself, but it certainly has a tendency to rhyme,” is a quote often attributed to Mark Twain. While it’s clear that this isn’t 2008, there are many trends and patterns that attentive observers can’t ignore.
The S&P 500 has risen over 200 percent in six years. There’s the recent appreciation of the U.S. dollar, the plunge in oil prices, the peak in margin debt, the surge in price-to-earnings ratios, and the decline in industrial commodity prices…
…all of these factors were similarly present leading up to the 2008 stock market crash.
Predicting the precise peak of a bull market is nearly impossible. Paul Farrell from MarketWatch believes a stock market crash is unlikely to occur this year; instead, he suggests it may happen in 2016 during the presidential election.
“When we compare 2016 with previous market crashes—those of 2008, 2000, and 1929—we can see that all bull markets eventually transition into bear markets,” observes Farrell. “Basic cycle theory suggests that the next crash will lead to losses larger than those seen in 2000 and 2008, so bet against the house at your peril.”
“Jeremy Grantham has already forecast that ‘around the presidential election or shortly thereafter, the market bubble will burst, as bubbles always do, reverting to its trend value, which could be half of its peak value or worse.’”
“This could result in the DOW plummeting from today’s level of 18,117 down to about 9,000.”
Sincerely,
MN Gordon
for Economic Prism
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