The stock market as measured by the Dow Jones Industrial Average hit an all-time high of 29,551 on February 12, 2020. In the following weeks it endured a number of crashes leading to a total decline of around 30% in a record short period of time.
On March 9, 2020 the Dow crashed over 2,013 points
March 12 saw a drop of 2,352 to close at 21,200… a drop of roughly 10 percent.
On March 16 it fell 2,997 points, a drop of 12.93% topping the October 1929 one-day crash of 12.82%.
This move hit bottom on March 23, 2020 with a close of 18,591 for a loss of well over 30% (actual loss was 10,960 points) in a record short period of time.
Since the current President has touted the stock market as a gauge of how well he is doing, let’s put that in some perspective. On Inauguration Day 2017 the Dow close at 19,825. The day after Election Day 2016 the Dow close was 18,589. So, the March 23, 2020 Dow close of 18,591 took out both those low points.
New Bull Market or Dead Cat Bounce?
Since the March 23 low, a strong Dow rally ensued, retracing about 50% of the decline thus far. If this move is nothing more than a ‘bear market rally’ or ‘dead cat bounce’ it would not be a surprise. Bear market rallies with a 50% retracement are not uncommon. Recall that after the October 1929 crash, the market rallied strongly into the spring of 1930. But after that rally… it proceeded to grind lower… eventually losing about 90% of its value. Whether the market is now in a new bull phase remains to be seen, but a new bull market seems the lesser of the possibilities going forward.
Chart courtesy of Macro Trends Dow Jones – 1929 Crash and Bear Market
Just yesterday we learned that Warren Buffet sold all his airline stocks and in his comments didn’t seem particularly bullish. Despite the optimistic talk from the White House suggesting the economy and the market will make a ‘V’ shaped recovery…frankly seems like nothing more than wishful thinking. It is hard to imagine the majority of the population will be comfortable getting on a train, subway, or plane or being in any crowded public space for a long time until there is either a cure for Covid-19 or a vaccine. A quick ‘V’ shaped bounce back seems highly unlikely.
Many analysts viewed the stock market as grossly overpriced many months before the coronavirus pandemic. They viewed stocks as being levitated by artificially low interest rates, which have been with us since the last economic collapse back in 2007/2008. And, traditional basic valuation metrics such as price/earnings ratios and book values were high but there was nowhere else to go as fund managers and investors searched for decent yields. The only option was to take on the risk and bet on the stock market. That strategy worked well until February of 2020. In addition to the search for yield, the low interest rates also made it possible for many large companies to borrow money are dirt-cheap rates, in order to do stock buybacks which would boost the price of their stock while enriching insiders as their stock options became worth many millions of dollars. Some of those companies will be seeking government bailouts now.
There were signs of problems before the coronavirus selloff. Of note were the problems in the repo market necessitating help from the Fed starting in September of 2019.
The current market has no shortage of red flags For instance, a week ago Goldman Sachs noted that the five largest S&P 500 stocks, Microsoft, Apple, Amazon, Alphabet (Google) and Facebook now account for 20% of the S&P 500 index market cap representing the highest concentration on record.
So here we are. The cheerleader in the White House expects a ‘V’ shaped recover for the economy and the stock market. Others expect an extended severe recession (probably to be labeled a depression at some point) and a resumption of the bear market. Betting on a quick recovery seems like a long shot. That bet seems like a sucker bet.
Some think now is the time to buy Gold
The hypothesis is that the massive infusion of liquidity by the Federal Reserve will lead to higher inflation (after a near term deflation), a weaker US dollar and then a massive rally in gold.
According to the Financial Times today (May 05 2020)
“Some of the largest hedge funds are raising their bets on gold, forecasting that central banks’ unprecedented responses to the coronavirus crisis will lead to devaluations of major currencies. Paul Singer’s Elliott Management, Andrew Law’s Caxton Associates, and Danny Yong’s Dymon Asia Capital are all bullish on the yellow metal, which has risen around 12 percent this year. They are wagering that moves to loosen monetary policy and even directly finance government spending, intended to limit the economic damage from the virus, will debase fiat currencies and provide a further boost to gold.”
”New York-based Elliott, which manages around $40 billion in assets, told its investors last month that gold is “one of the most undervalued” assets available and that its fair value was “multiples of its current price.”
In the video below author James Rickards is forecasting for gold to reach $16,000 an ounce in the next 4 years saying it will be the best performing asset class in this period. Rickards says we are in a new bull market for gold. He suggests the last two bull markets in gold, the one from 1971 to 1980 saw gold advance over 2000% while the next gold bull market, from 1999 to 2011, saw an advance of about 700%. So, he is taking an average gain of the last two bull markets in gold to forecast a gain of 13X or 1,300% over the next 4 years. There were bear markets in gold in between from 1980 to 1999 which produced a loss of 75% while the gold bear from 2011 to 2015 saw a loss of 50%. Meanwhile, Rickards says the current bull market in gold started on December 16, 2015 from a gold price of $1050.
Watch Video – Jim Rickards