This Time Could Be Much Worse

Here’s the S&P 500 chart going back 15 years. We had a big rally during the late 90’s…a big sell-off from 2000-2002…a big rally from 2003-2007…a big sell-off from 2007-2009…a big rally from 2009 to 2011…and now we’re in the beginning stages of a big sell-off.

Will this time be different? Comparing the current situation to the previous two tops suggests this time could be worse. Here’s why:
The 2000-2002 Bear Market: When the market topped in 2000, the general mood in the country was great, the economy was doing great and prosperity was everywhere. Unemployment was low and housing was, well it was housing – boring and a reliable storage place for wealth. The stock market was very high, and the Fed Funds rate was at 6.5% (after Greenspan raised it in the summer of 2000). If the market was going to come down hard, the circumstances could not have been better.
The people most effected by the tech bubble bursting were the ones best able to bounce back – smart, educated, 25-year olds. Some got jobs with other companies; others started their own companies; and others went back to school to get their MBAs or other advanced degrees. The group most effected had the brains, initiative, talents and ability to take a deep breath and start over. The Fed also had all the tools in the tool box to use to prevent a total market collapse. The Fed Funds rate was lowered to 1.0%. Pain was felt, but other than stock market losses, it wasn’t hard for America to bounce back (even though it took a couple years).
The 2007-2009 Bear Market: When the market topped in 2007, the general mood was pretty good, the economy was doing well, and prosperity was present but not as prevalent as in 2000 (how could it be, the internet enabled the largest expansion of wealth in history). Unemployment was low, and although housing had already topped, it hadn’t come down too much (other than a couple places where it ran out of control) and foreclosures and steep losses were not headline stories yet. The stock market was at all-time highs (not the Nas which was artificially inflated by companies that don’t exist any more), and the Fed Funds rate was at 5.25%. So again, if the market was going to come down, the conditions were pretty good. On the flip side, making matters worse (than 2000), two very expensive wars lingered, and our national debt was becoming a joke.
The banking crisis that followed had the potential to cripple the worldwide economy (unlike the tech bubble bursting), but again America had a cushion and the Fed had access to an assortment of tools to dampen the intense selling pressure (Fed Funds rate lowered to basically 0.0%, banks and insurance companies got bailed out). The country was in a position to avoid a total collapse (whether you agree or disagree with the tactics used).
The 2011-20?? Bear Market: We are nowhere near as well positioned to deal with a bear market. The general mood is very negative. Republican or Democrat – doesn’t matter – people are sick and tired of Washington. If you use the market averages to hint at the economy’s strength, you’d be tricked into thinking things are going well. They aren’t. The averages are controlled by the large, multi-national corporations which can easily tap cheap labor markets overseas and benefit from a favorable exchange rate. The reality is corporations are not growing organically, and the economy hasn’t improved much since the financial crisis ended. Unemployment has been above 9% for 2-1/2 years, and housing is in the dumps and could take two decades to recover. The Fed Funds rate is already at 0.0%. The financial system was bailed out, and even though banks have recorded recorded profits, they’re still sitting on hundreds of billions in losses (thanks partially to suspending market-to-market accounting), and are not much better off today than two years ago. QE1 and QE2 helped prop the market up, but the benefit hasn’t been felt by average Joe American. Other than the market being near its highs, the circumstances for a bear market couldn’t be worse.
In a nut shell, with unemployment high, housing in the dumps, failed bailouts in recent memory, failure Fed stimulus, an already-low Fed Funds rate, what can be done to stimulate the economy or dampen a market collapse? Suspend short selling? That’ll cause a 1-week rally. Then what.
Bottom line…we are not positioned to deal with the stock market getting cut in half.
Jason Leavitt