The "Christmas Eve Massacre" And Where We Stand Now

 

First and Foremost …

By early October, 2018, the S&P 500 had more than quadrupled off its 666, 2009 secular bear market low (up over 300%). This was capped off by a spectacular 24 month run that saw the S&P 500 increase more than 50% to a new all-time-high of 2951.81 (10/3/18). I would say a correction of some magnitude (-10% or better) or even a cyclical bear market (-20% or better) would have been in order and to have been expected. This is entirely normal. 

The Dow Jones Industrial Average and S&P 500 both came very close to the arbitrary official bear market level but did not breech it during the December rout. The tech-laden Nasdaq composite made it, down 24% from its August 30, peak … the Russell 2000, ditto, down 24%.  Could it continue? Sure. Some are suggesting a retest of the December 24, lows is needed. However, during the collapse, we worked off a tremendous amount of market enthusiasm for stocks and turned it into palpable fear and historically, 20% of the time those retests don’t happen.

From here, a look backward I feel would be useful … getting our bearings, shall we say.

The Origin Of The Collapse Was The September 26  Fed Fund Rate Increase

Federal Reserve bank
of the United States

That move, IMHO, was the trigger event. According to the punditry, including the likes of Jim Cramer, this was too aggressive a move and would likely cause the beginning of an economic contraction that could lead to a recession (defined, two consecutive quarterly declines in GDP). Stop and think about this definition for a moment–a recession, two consecutive quarters of GDP declines! It is stunning that the prospect of a RECESSION, a normal and very survivable economic event, could cause investors (not sure why we use this descriptor) to literally throw away their stocks. But they did just that in the few days leading up to Christmas Eve. I lay this squarely at the feet of a media that consistently makes the “R” word look like the worst thing that could happen without giving any perspective on what the effects of a normal recession might be.

Adding fuel to the fire the Fed, in its statement raising rates, said that it would likely go again in December giving us a four-month total increase of 1/2 of 1 percent by year-end to 2.5%. This sent the market into a precipitous decline with the so-called experts screaming this would lead to much higher interest rates which would strangle the economy. Now, there were other issue (trade, a China slowdown, Brexit, etc.) but the Fed and rates was the trigger, exacerbated by the 1/4 point hike in December.

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