The market is pricing in ‘widespread disaster’ that’s hard to see
I thought I was seeing fine. I’ve worn contact lenses for decades, so I was convinced that was the case. Maybe not.
Who brought me around to the truth? The market, of course. I learned ages ago that the market is a lot smarter than I am. That collection of buyers and sellers out there has more accumulated wisdom than I could ever aspire to and it’s given us a sharp smack across the face. Don’t mess with a market that’s pounding you with its message. The market has made it totally clear to me that I don’t have my eyes open, and if I do, I am not seeing clearly.
What is the market telling me that I have missed in my myopic haze?
We’re in a recession, right? Or at least we will be early next year. That means, of course, that GDP numbers will be revised down, way down. It means that the numbers we have been looking at are an illusion. For example, I have paid attention to the fact that a lot of people are working with only 3.7 percent unemployment, which is strong even accounting for a low participation rate. Since two thirds of GDP derives from our consumer economy, it matters that wages are up 3.1 percent, and personal spending is up. Perhaps that’s not the case anymore.
The market says that a recession must be creeping into all corners of this economy, and if I had a stronger lens prescription, I would have seen it. Retail sales, for December, are up over 5 percent year over year, but that must be a mistake. When everyone returns what they bought, the actual numbers will come down. Not just consumer spending, but housing, banking, industrial and technology spending – it’s going to vanish and so will all those profits we had expected. We thought earnings would grow 6 percent to 8 percent next year, but nope, the market says we are in for a much tougher 2019.
Three months ago, or what felt like a decade at this point, the biggest fear was a spike in interest rates. The week after the 10-year Treasury yield hit 3.23 percent in October, the S&P fell 4.6 percent, and another almost 3 percent when rates hit that level again. Rates have moved down over 15 percent since that recent peak, which should be a positive. If up is bad, isn’t down good? But it turns out that lower rates are also bad. Stupid me.
Inflation is roughly at the Fed’s target rate – around 2.2 percent. That group of deep thinkers, at least, feels comfortable with this level of inflation. The market knows in its wisdom that something insidious is happening with inflation. Those threatened tariffs must be to blame – there will be no resolution and the resulting price escalation is going to create an inflationary skyward spiral. We thought the president would make a deal with great flamboyance, proclaiming victory against the Chinese and saving the economy. The intensity of the market move downward tells us that this won’t happen any time soon.
Okay, market, you win. But, here’s a question. The S&P 500 is down 20 percent from its high in September. It is selling for 14.5 times the last twelve months’ earnings. Don’t you, in your wisdom, price in the future good and bad news? If stock prices were too optimistic, how about at levels that are 20 percent or more lower than in September, to say nothing of the many stocks down 30 percent to 60 percent from their 2018 highs?
I promise that I will see an eye doctor right away to correct my vision. But, here’s my concern about what you’ve done, market. When I was younger, there was the 1987 crash and rebound so that doesn’t count: the crazy 2000 dotcom bubble, with valuations so extreme that we sensed the surreal nature of that environment even as we were willing participants; and then the 2008 self-inflicted collapse of the banking industry, almost destroying every economy in the world.
My vision isn’t honestly that much worse now, and I admit that I don’t always pay attention to every detail, but I don’t see that level of widespread disaster. I do see the problems from tariffs, international economies, commodity price weakness, and overvaluation of private companies, but we are down 20 percent now already. All those cynics who, for years, have predicted the end of the longest bull market in history, have finally been correct. Is the total environment worth less than 80 percent of what it was one quarter ago?
Do we all need new glasses?