Super long term view to put in context the current events of March 2020 and try to assess the probabilities of a bear market.
As you can see when you draw SPX in log scale you can draw some pretty accurate trendlines that hold for the whole history since 1929.
March 2020 touched (and even dropped below) the lowest yellow trendline, so I just compared other historical moments when this happened in the past to try to get some insights about whether we might enter a bear market or not. I'll start in 1953 as it is the first time it touches the trendline afeter a multiyear bull market (1942-1952).
As you can see, the bull market continues after touching the trendline in:
- Recession 1953
- Kennedy slide
- Black Monday
- Savings and loans crisis
- Dot com bubble
- Slowdown 2015
- Slowdown 2018
The trendline does not hold and is followed by a bear market in:
- Vietnam war
- GFC 2008
Therefore to assess the probabilities of the line not holding and being followed by a bear market in 2020, we should analyze all these scenarios and put them in context asking two questions:
- What motivated these recessions?
- What was the response of the FED and the government?
So analyzing the two bear case scenarios:
- In the case of Vietnam War, measures to get out of the recession included lowering interest rates and breaking the Bretton Woods agreement some months later. This caused later a peak of inflation during the 1970s in the US.
- In 2008 once FED dropped interest rates and started QE market bottomed and a new bull market started.
In bull case scenarios (rest of them) measures taken included usually lowering interest rates + some kind of fiscal or monetary stimulus.
Now 2020 is another different animal. Interest rates were already low before 2020, so we have the law of diminishing returns playing out here, it will have little effect as a policy response. Therefore MMT will be the path to follow with a coordinated monetary and fiscal response.
My take is that this will create an environment similar to that in 1970, when inflation took place because of the doubts about the US being able to pay in gold terms (remember De Gaulle). With US Treasuries returning 0% there is little to no incentive from international investors to hold them, and they may start dumping them to get the dollars they need for international payments, this can create an inflationary spiral in which FED will be the only buyer of US Treasuries thus effectively monetizing debt, and trust in US dollar as a reserve currency will be lost leading to a reform of the international monetary system (all hail crypto?).
However I think this kind of crisis in the SPX will cause equities to keep rising just by mere inflation caused by MMT and TINA (there is no alternative). A bear market would only be possible under more restrictive monetary policy or if deflation caused by coronavirus could not be reversed, but currently this does not seem to be the case.
More info about recessions at en.wikipedia.org/wik...in_the_United_States
As you can see when you draw SPX in log scale you can draw some pretty accurate trendlines that hold for the whole history since 1929.
March 2020 touched (and even dropped below) the lowest yellow trendline, so I just compared other historical moments when this happened in the past to try to get some insights about whether we might enter a bear market or not. I'll start in 1953 as it is the first time it touches the trendline afeter a multiyear bull market (1942-1952).
As you can see, the bull market continues after touching the trendline in:
- Recession 1953
- Kennedy slide
- Black Monday
- Savings and loans crisis
- Dot com bubble
- Slowdown 2015
- Slowdown 2018
The trendline does not hold and is followed by a bear market in:
- Vietnam war
- GFC 2008
Therefore to assess the probabilities of the line not holding and being followed by a bear market in 2020, we should analyze all these scenarios and put them in context asking two questions:
- What motivated these recessions?
- What was the response of the FED and the government?
So analyzing the two bear case scenarios:
- In the case of Vietnam War, measures to get out of the recession included lowering interest rates and breaking the Bretton Woods agreement some months later. This caused later a peak of inflation during the 1970s in the US.
- In 2008 once FED dropped interest rates and started QE market bottomed and a new bull market started.
In bull case scenarios (rest of them) measures taken included usually lowering interest rates + some kind of fiscal or monetary stimulus.
Now 2020 is another different animal. Interest rates were already low before 2020, so we have the law of diminishing returns playing out here, it will have little effect as a policy response. Therefore MMT will be the path to follow with a coordinated monetary and fiscal response.
My take is that this will create an environment similar to that in 1970, when inflation took place because of the doubts about the US being able to pay in gold terms (remember De Gaulle). With US Treasuries returning 0% there is little to no incentive from international investors to hold them, and they may start dumping them to get the dollars they need for international payments, this can create an inflationary spiral in which FED will be the only buyer of US Treasuries thus effectively monetizing debt, and trust in US dollar as a reserve currency will be lost leading to a reform of the international monetary system (all hail crypto?).
However I think this kind of crisis in the SPX will cause equities to keep rising just by mere inflation caused by MMT and TINA (there is no alternative). A bear market would only be possible under more restrictive monetary policy or if deflation caused by coronavirus could not be reversed, but currently this does not seem to be the case.
More info about recessions at en.wikipedia.org/wik...in_the_United_States