Is Enough Baked In?

Is Enough Baked In? image

After a very scary decline and then an impressive rally, the question most investors are probably asking themselves is, where are we now?

In order to get our bearings, let's review where we've been. Recall that as of the market close on Christmas eve, the bears had pummeled the S&P 500 for a loss of -19.78% from the September 20th high water mark. Through December 13th, the decline had been orderly and fairly well contained. There were worries over this and that, but since the February/March lows had not been exceeded, a great many analysts (including yours truly, truth be told) were calling the action a garden-variety correction.

But then the bottom fell out. Over the next 7 sessions (one of which was a half-day), the S&P dove an eye-popping -11.3% as technical levels snapped like toothpicks, algos ran in high gear, and a bearish market environment took hold.

The thinking was the market was facing a triple threat of negatives that would surely end in the type of bear market cycle last seen in 2007-09 and 2000-02. It was a combination of fears over (1) the Fed overshooting again and pushing the economy into recession, (2) the trade war with China dragging on and sending the global economy into recession (or deeper into recession, depending on who you talk to), and (3) the simple fact that both earnings and economic growth were slowing both at home and abroad.

So, there it was. A bearish narrative that by late December became hard to argue with. This was going to end badly, we were told. Credit conditions were tightening - a lot as folks began to realize that a boatload of low-quality debt needed to be refinanced soon. The words contagion and systemic risk began making the rounds. Funds began to blow up. Forced sales started happening. Market models of all shapes, colors and sizes flashed red. And after a -15.74% drubbing in just 14 days between December 3rd and 24th, it certainly felt like the stock market was experiencing Déjà vu all over again and that the bad old days of the Financial Crisis had returned.

Instead of a run-of-the-mill correction, it now appeared that a bear, of the big, bad variety, was upon us. All hope was lost. To borrow a phrase from Mr. Jeff Macke, there were only two positions that mattered, cash and fetal.

A Funny Thing Happened On The Way To The Debacle

But just when it looked and felt like the world was about to end, one Kris Kringle showed up at the corner of Broad and Wall. Loaded with a sleigh full of toys - and some magic words from Jerome Powell - the Santa Claus rally began in earnest. Sure, Mr. Claus was a tad late. But when the U.S. and China started talking turkey about a deal, the mood suddenly changed, and the traditional Santa Claus rally ripped higher.

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Disclosure: At the time of publication, Mr. Moenning held long positions in the following securities mentioned: none - Note that positions may change at any time.

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Gary Anderson 3 months ago Contributor's comment

So a decline in earnings has become neither a major headwind or tailwind for stocks. That is murky at best. But it is an interesting article.