On The Way To The Bottom? - Weekly Blog # 730

                                    

Mike Lipper’s Monday Morning Musings

On The Way To The Bottom?

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –

When amid a campaign with no predetermined finish, it is difficult to guess both the timing and the result. We are in that position today and the best we can do is guess. Generally, there are two approaches to guessing. The first is to evaluate past contests and the second is to focus on current conditions. I will briefly do both, including two surprising differences.

History

Each market and/or economic decline is different. Pundits use labels for stock markets, such as market phase, correction, and bear market. Economic declines are divided into cyclical and structural. None are tight descriptions, but are somewhat useful in describing what has happened, with some predictive value.

Stock Market Declines

A fall of 20% from a former peak is called a bear market, a decline of 10% is labeled a correction, and a smaller decline is called a market phase. The problem today is the three popular US stock market indices can each be labeled with a different name:

DJIA               -8.82%  =  Market Phase

S&P 500           -12.28%  =  Correction

NASDAQ Composite  -25.06%  =  Bear Market

The majority of the public and therefore politicians get their brief market news based largely on the DJIA. Securities distributors and thin staffed financial institutions use the SPX, while professional traders pay attention to the NASDAQ. No wonder there is confusion concerning the current state of the market and to some extent where it may go. Almost by definition, the greater the decline the sooner a bottom is reached. Long-term subscribers know that I often find the NASDAQ composite a better market predictor than the others two measures. The NASDAQ led both on the way up and down. The reason for this is the junior index having proportionally less passive (index) investors making specific stock judgements. 

If you accept this analysis, then we have reached the level beginning a bottom, as most bottoms occur after a 25% decline. Consequently, followers of the NASDAQ can start to believe the bottom for this market is in range. This view is backed up by the level of transactions on the NYSE and NASDAQ, plus the number of new lows for the week ended Friday. On a year-to-date volume basis, the NYSE is +6.98% and the NASDAQ -6.10%. Last week the number of new lows on the NYSE was 649, versus 1023 on the NASDAQ. (In analyzing the NASDAQ, it is important to recognize that technology stocks were the leading sector, both rising and falling. (In the long-term future, I believe “tech” stocks will be among the leaders, but not necessarily the same names.)

Cyclical or Structural Economic Declines

Cyclical economic contractions are much more frequent than structural changes. Typically, cyclical contractions are caused by excessive money supply growth, which leads to too much borrowing and inflation. 

Symptoms 

We are currently experiencing those symptoms. The M2 measure of money supply growth is currently +13.21% on a year-to-year basis, which clearly includes what politicians call stimulus and I call political bribes. Not surprisingly, this has led to the JOC-ECRI growing +17.37% this year. (The good news is the index dropped 1.51% this week). Consequently, it is reasonable to speculate a recession is in our future.

The critical risk is political leaders transforming a cyclical downturn into a structural one, as they did globally in the 1930s. This is not a prediction, but as a trained US Marine I am always alert to a sneak attack and need to be aware of the risk. There are currently an unfortunate number of parallels with the 1930s. Despite a general economic expansion globally, there is a vocal minority that can be leveraged by politicians (Remember, I believe Mark Twain said the job of a politician is to find a parade and get in front of it). 

Current leadership is becoming more autocratic in several countries. Small regional wars have the potential to become global wars e.g., Ukraine>>>Black Sea >>>Asia Minor >>>>East vs West?.

The French Presidential election demonstrates much of the population votes against. This election conforms to the view that there are almost no popular governments, just more popular than the opposition. This in turn makes long term plans difficult, which in turn also makes investment judgements difficult.

Question: What do you think?

Did you miss my blog last week? Click here to read.

https://mikelipper.blogspot.com/2022/04/short-long-term-thoughts-weekly-blog-729.html

https://mikelipper.blogspot.com/2022/04/is-this-great-investment-era-ending.html

https://mikelipper.blogspot.com/2022/04/wwiii-slightly-delayed-bear-market.html

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