BEAR MARKET
Robert O. Welk RowTek Economics
The
recent high daily close for the S&P 500 was 1565.15 on October 9,
2007. On October 31, 2008 the close was 968.75, down 38%. The
recent
high weekly average was 1559.28 for the week
ended October 12, 2007. For the week ended October 31, 2008 the
average was 928.47, down 40%.
Conditions in the economy are reckoned by some experts to be the worst since the Great Depression. The Treasury and Federal Reserve have pulled out all stops, but they don't seem to know how the various measures will interact. No one understands exactly how the U.S. Treasury will dispose of the worthless securities on the balance sheets of financial institutions, even with the $700 B Rescue Bill that has been passed. Capital has been forced on large banks. The Fed is now active in the commercial paper market. The financial crisis is global with first-time concerted action on interest rates being taken. An international conference has been scheduled in Washington DC on November 15 to consider what should be done. The real economy is in recession in the U.S. Other countries are also in recession or slow-growth mode. Forecasts are of little value, but it seems almost certain that 2009 will be a very difficult year. Complicating the outlook is not knowing how the election result will impact the economy.
The bands on the chart are a simple technical attempt to gage the likely course of stock prices for the future. The bands connect the recent peaks and lows during the downtrend which has been underway for the past 13 months. Amazingly the upper and lower bands are exactly parallel. The spread of the bands is the median plus and minus 5.5%, i.e., the recent volatility range. The slope of the bands is minus 15% per year.
All the weekly averages were staying within the bands until the week ended October 3rd which dropped 5% below the bottom band. Each successive week in October dropped further,except for a minute improvement in the fourth week. Even so, it was 21% below the bottom band. In order for prices to reach the bottom "bear-market" band by the last week of 2009, they would have to increase 12% from the week just past. There have been increases that large in daily closing prices, but the wide variability that has been occurring within a week makes such moves irrelevant. Weekly data average out the wide variability to some extent. Improved fundamentals and investor confidence must return before equity prices stabilize and begin to move up.
There are signs that some of the "bailout" efforts are beginning to be effective. Spreads between some key interest rates have begun to decline. The Depository Trust & Clearing Corp. is beginning to obtain critical information on credit default swaps, a key factor in the credit collapse. The Federal Reserve has reduced the federal funds rate to 1%. A disturbing observation however is that long-term Treasury rates have moved up instead of down. The market is known to look forward. It is recognizing that the nearly one trillion dollars being used for coping with the credit crisis will have to be covered by a huge sale of Treasury bonds. To clear the market of those bonds, yields, i.e., interest rates, will have to rise sharply. It also means the dollar will weaken, and that means inflation sometime in the future. The future is so uncertain because it is impossible to know how all these forces will interact. What else will occur that no one has anticipated?
END
Copyright © 2008 RowTek Economics. All rights reserved.
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Conditions in the economy are reckoned by some experts to be the worst since the Great Depression. The Treasury and Federal Reserve have pulled out all stops, but they don't seem to know how the various measures will interact. No one understands exactly how the U.S. Treasury will dispose of the worthless securities on the balance sheets of financial institutions, even with the $700 B Rescue Bill that has been passed. Capital has been forced on large banks. The Fed is now active in the commercial paper market. The financial crisis is global with first-time concerted action on interest rates being taken. An international conference has been scheduled in Washington DC on November 15 to consider what should be done. The real economy is in recession in the U.S. Other countries are also in recession or slow-growth mode. Forecasts are of little value, but it seems almost certain that 2009 will be a very difficult year. Complicating the outlook is not knowing how the election result will impact the economy.
The bands on the chart are a simple technical attempt to gage the likely course of stock prices for the future. The bands connect the recent peaks and lows during the downtrend which has been underway for the past 13 months. Amazingly the upper and lower bands are exactly parallel. The spread of the bands is the median plus and minus 5.5%, i.e., the recent volatility range. The slope of the bands is minus 15% per year.
All the weekly averages were staying within the bands until the week ended October 3rd which dropped 5% below the bottom band. Each successive week in October dropped further,except for a minute improvement in the fourth week. Even so, it was 21% below the bottom band. In order for prices to reach the bottom "bear-market" band by the last week of 2009, they would have to increase 12% from the week just past. There have been increases that large in daily closing prices, but the wide variability that has been occurring within a week makes such moves irrelevant. Weekly data average out the wide variability to some extent. Improved fundamentals and investor confidence must return before equity prices stabilize and begin to move up.
There are signs that some of the "bailout" efforts are beginning to be effective. Spreads between some key interest rates have begun to decline. The Depository Trust & Clearing Corp. is beginning to obtain critical information on credit default swaps, a key factor in the credit collapse. The Federal Reserve has reduced the federal funds rate to 1%. A disturbing observation however is that long-term Treasury rates have moved up instead of down. The market is known to look forward. It is recognizing that the nearly one trillion dollars being used for coping with the credit crisis will have to be covered by a huge sale of Treasury bonds. To clear the market of those bonds, yields, i.e., interest rates, will have to rise sharply. It also means the dollar will weaken, and that means inflation sometime in the future. The future is so uncertain because it is impossible to know how all these forces will interact. What else will occur that no one has anticipated?
END
Copyright © 2008 RowTek Economics. All rights reserved.
BACK TO MAIN PAGE