• 151 days Could Crypto Overtake Traditional Investment?
  • 155 days Americans Still Quitting Jobs At Record Pace
  • 157 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 161 days Is The Dollar Too Strong?
  • 161 days Big Tech Disappoints Investors on Earnings Calls
  • 162 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 163 days China Is Quietly Trying To Distance Itself From Russia
  • 164 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 168 days Crypto Investors Won Big In 2021
  • 168 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 169 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 171 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 171 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 175 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 175 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 176 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 178 days Are NFTs About To Take Over Gaming?
  • 178 days Europe’s Economy Is On The Brink As Putin’s War Escalates
  • 181 days What’s Causing Inflation In The United States?
  • 183 days Intel Joins Russian Exodus as Chip Shortage Digs In
Is The Bull Market On Its Last Legs?

Is The Bull Market On Its Last Legs?

This aging bull market may…

What's Behind The Global EV Sales Slowdown?

What's Behind The Global EV Sales Slowdown?

An economic slowdown in many…

Prieur du Plessis

Prieur du Plessis

With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in…

Contact Author

  1. Home
  2. Markets
  3. Other

Economic Woes Torpedo Stock Markets

Yesterday was another ugly day for stocks, with bourses around the globe falling victim to strong selling pressure. Fueling the sell-off were concerns that the economic recession could not only be deeper and longer than previously feared, but also fall into a corrosive deflationary phase.

The MSCI World Index and the MSCI Emerging Markets Index fell by 4.6% and 2.2% respectively, tallying declines of 51.2% and 63.4% since the peaks of these indices in October 2007. Only the Chinese Shanghai Composite Index (+6.0%) and the Russian Trading System Index (+0.7%) bucked yesterday's declines.

A (very red) market map, obtained from Finviz, providing a quick overview of the performance of global stock markets (as reflected by the movements of ADR stocks).

As far as the US markets are concerned, the Dow Jones Industrial Index (-5.1%) plunged below the roundophobia 8,000 level, resulting in all the major indices now trading below the recent lows of October 10 and 27. This brings the lows of 2003 (Dow 7,524; S&P 500 801) and 2002 (Dow 7,286; S&P 500 777) into sight. A breach of these levels - frightfully close to the current levels of the Dow (7,997) and S&P 500 (807) - will wipe out the entire five-year bull market from 2002 to 2007.

Interestingly, only 2.4% of the 500 S&P 500 stocks now trade above their 200-day moving averages. This line is often used as a crude indicator of the primary trend of a market or individual stocks. The graph undeniably shows an extremely oversold situation, but bear markets have been known to stay oversold much longer than usual.

One can argue long and hard about valuation levels and earnings forecasts, but the extent to which stocks become undervalued in the grip of this bear is squarely in the hand of the severity of the economic meltdown. This is clearly shown by the relationship between the Dow Jones World Index and the Baltic Dry Index - an assessment of the price of moving the major raw materials, including coal, iron ore and grain, by sea and generally an excellent barometer of economic activity.

The worrisome prospects for economic and earnings growth, together with the threat of deflation, are spooking the financial markets. The extreme level of risk aversion is illustrated by the US three-month Treasury Bill rate falling to a minuscule 0.065% - a clear sign of distress and fear - and the yields on long-dated government bonds falling significantly in most parts of the world.

Here is what Richard Russell (Dow Theory Letters) - one of the few market commentators with first-hand experience of the Great Depression - has to say: "The market is warning of a coming depression. Next year there'll be a huge problem of unemployment, job openings will have disappeared, and every business will be going over its personal thinking in terms of who the business can do without.

"The sentiment in the country will be dark grey to jet black. Fortunes will have been wiped out. Thousands of savings plans and 401Ks will have been shattered. Americans who have never experienced true hard times will be living hard times. Confusion and fear will be rampant. How do I know all this? I've been here before, I know the signs."

Oversold conditions have so far not produced more than a temporary reprieve, and nobody knows how far down this bear market will fall. Until we see more signs of base formations being developed, one should tread very cautiously. And remember the old Boy Scout adage: "Be prepared".

Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.

 

Back to homepage

Leave a comment

Leave a comment