The markets have caught a flu of their own. While I have quarantined myself in front of my computer console battling the market’s woes, I have also had the opportunity to speak to many of you on an individual basis as to my opinion on the market decline. As a result, I want to conduct this edition of MGF in a Frequently Asked Question (FAQ) format, using some of the questions I have received and others that should be asked. In no particular order:
Q. Is the market in a bear market?
A. No but we are getting close. Bear markets are, naively, defined as a 20% decline from a market high. Conversely, bull markets are, again naively, defined as a rise of 20% from a market low. Of course, there is also by this definition, a need to define highs and lows. Are they intraday or closing levels? Let me just say that let’s agree to use the market close levels as that data is more accurate. If that 20% definition were the case, bull and bear markets would occur more often. However, a more robust definition would look at markets in a secular sense. A secular bear market began in 1966 and ended in 1982. The ensuing bull market lasted until 2001. A bear market then followed which lasted until 2013. While the market bottomed in 2009, the bear market downtrend was not broken until 2013, when the current bull market began. Thus, secular bull and bear markets can last well over a decade. Therefore, we need to ask, when will the bull market trend line be breached? Take a look at this chart. I am going to say that the trend line is about 2,350 for the S&P 500 (SPX). From yesterday’s close that would imply another decline of 5.25%. Given the market volatility of late, we could certainly see that occur.
Q. Are we in a recession?
A. Typically we won’t know if we are in a recession when one first begins but rather some time after. Definitionally, a recession will occur after two consecutive quarters of negative GDP (Gross Domestic Product) and after several months of job losses. Both conditions do not currently exist. The primary causation of a recession is a tightening of credit availability. Such was the case in the Great Recession in 2007-09. The second primary cause is a condition of excessive supply. This forces a slowing down or cessation of manufacturing, job losses and price declines. Occasionally a sudden shock from an externality will cause a recession, such as the attacks on 9/11 or Iraqi invasion of Kuwait. These types of recessions tend to be short lived and shallow. If anything, the coronavirus would cause such a recession. However, we still won’t know until the economic data confirms the “shock” recession.
Q. Are the financial markets broken?
A. Yes and no. The stock market is functioning rather normally. Circuit breakers are working as designed. If anything, stock market participants are not functioning normally. Specifically, the algorithmic program traders, which are unregulated are trying to break the system. Unfortunately, both regulators and legislators are unwilling to take on the “algos.” Furthermore, excessive leverage being offered by some brokers to hedge funds is, as is usually the case, resulting in forced margin call selling. The oil market is broken and clearly is spilling over to the stock and credit markets. The government bond market is functioning well. However, the corporate bond market is broken. Liquidity is poor and bid / offer spreads are wider than normal. Also, the high yield market is exhibiting stress.
Q. Are we panicking over the coronavirus?
A. This is a very subjective question. Some people believe yes, and others believe not. Until proven otherwise, the H1N1 crisis which killed nearly 13,000 Americans was more severe than the Covid19 crisis. The H1N1 crisis did not elicit panic and that is a problem with our media and tribal politics. Of course, the severity of the current health crisis could change. Like it or not, closing the border with China and the EU will derive benefits to American citizens. Hoarding food, toilet paper, hand sanitizer and masks are selfish acts that hurt others who don’t have access to those products.
Q. (from my youngest son) Should the Federal Government tax marijuana sales in order to raise funds for Covid-19 economic relief?
A. To be honest, this is a question that I never considered. Given that the marijuana use is legal or decriminalized in one form or another in most states, such a taxation makes sense. I am not sure that our Congress and President are ready to take this on.
Q. Does a payroll tax holiday make sense?
A. Most definitely. The impact will be immediate and benefit those that need it most, middle and lower class workers. Any delay could result in further harm to the economy.
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Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long SPY, SSO & SPXL – although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right-hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
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Why do Algo trader want to “break the system?” Seems to me they are raking in the cash.
Since the SEC eliminated the uptick rule over a decade ago, the Algos can short unabated on a downtick. They really don’t care about the integrity of the market