Well that didn’t take long. When GDP on Thursday morning revealed we are, in fact, crashing into recession, and the market flew like a released bird into the heavens, I noted in my last article that the market’s lunacy was just what I expected from delusional investors. That was a relief rally from the earlier decline that had run pretty much all month long, and I said the rally would not last long before it came crashing down. And so it didn’t. The euphoria lasted all of a day on Thursday, and crashed like a Caterpillar bulldozer rolling off a cliff the next day.
On Thursday, I wrote …
It came as no surprise to me that stupid investors today see this as good news for stocks because, still living in the la-la-land of their empty heads, they see this as insurance that the Fed will not tighten so quickly. While the Fed may not tighten as much as it would have, it is incredibly naive to think that will save the stock market because we are already in a rapidly plunging recession that will tear everything apart. But those who refuse to see reality, say, “Ah, but now the Fed won’t tighten so fast.” I expected the market would glibly soar when the GDP report came out today based on that obtuse, glib hope that now the Fed will go straight back to money printing….
I have no doubt the Fed will be more hesitant to tighten and may not tighten as much over the long run, but it still has face-ripping inflation to contend with, and it will be take more time for this recession to pull down inflation than the Fed has time politically to wait it out. The Fed knows it has to be seen as fighting inflation. Even if it cannot solve this kind of inflation, based in part as it is on shortages, it certainly cannot be seen fueling inflation even higher by dumping coal into the firebox….
So, the stock market’s bounce today is likely to be short-lived because it is all false hope (false sentiment) that is going to get the belly ripped out of it by reality (again). I don’t think it will take long for the hangover from the market’s drunken revelry today to set in…. The market is ready to celebrate Fed relief is coming, but Fed relief is not coming that quickly, so the Fed will certainly be tightening into recession, since we are already in one.
And, so, Friday, the market woke up to think about the realities of a recession suddenly staring back at them from the mirror. That ugly truth will remain in front of them, regardless of what the Fed does. It took no change in the news at all to completely knock the exuberant market down in a horrible hangover when investors woke up Friday morning and reflected on what they were seeing.
But just how bad was it?
Let me tell you in the words of others, so you don’t have to just take my word for it:
This is the 12th worst month for NASDAQ ever.
A negative 13.3% qualifies for a 12th worst ever. You would have needed -15% to make it into the “worst 10” list (beating November 1973). To be the worst month ever you have to beat October 1987 that has a 27% decline.
So, Friday’s cliff-fall turned around a lovely relief rally on the bad GDP print to take the month of April fools down into the “one-of-the-worst” club. To put that in perspective …
NASDAQ biggest drop since GFC
…biggest monthly drop since 2008.
S&P500 worst month since March 2020
And we all remember how nasty March 2020 was, so that would be a hard one to beat since it holds the historic record for steepness of the plunge.
Amidst the mayhem, the worst stock-market sector was the one we most closely associate with our consumer-based economy — “Consumer Discretionary” — which constituted 2.28 points of the S&P’s 13% correction.
Yes, Friday pushed all major indices fully into correction mode again (second time this year) and the NASDAQ fully back into the bear market it entered this past winter.
The news gets worse if you factor in inflation to look at real yields in stocks in the same way investors look at real yields in bonds. Adjusted for inflation, a person’s investment in the S&P is …
down around 18% YTD, the biggest real terms fall since 1974.
Looking at the supposed almighty leaders, Amazon’s total drawdown since it’s last high is now a 34% nosedive. Imagine that one of the world’s largest companies has already lost a full third of its value! But, for others, the picture looks much, much worse:
More than 45% of US stocks have lost more than 50% of their total peak value while almost a quarter of the full market has experienced a loss of three-quarters of their peak value. Wow! A 75% wipeout in just a matter of months, and there is still plenty of damage inflation is going to inflict by forcing the Fed’s tightening hand.
Looking at total market losses, the only months in this millennium that have taken as much of a broad-market wipeout as April delivered were October 2000, November 2002 (both part of the dot-com bust), April 2009, part of the Great Recession, and March 2020, the Covidcrash. Have I not said this market crash will play out over time like the dot-com bust did, particularly taking out the highest fliers, and that the recession it creates will be as bad as (or worse than) the Great Recession?
So, some of the biggest April fools on record are those who thought they would buy into the recent bear-market rally and become winners. That rally is now dead and gone because the market sits lower than the bottom from which it rallied. So, it failed. Bear-market rallies, I’ve noted, become bull traps precisely because they are usually scorchers that get the bullish adrenaline surging again. In fact, the more sentiment has been trending steeply and reliably upward, the more intense such relief rallies are likely to be because old sentiment dies hard.
It only took one day for investors to figure out that plunging into a recession is not going to save the market — even if it does slow the rate of the Fed’s tightening plans some — because the present GDP print certainly is not going to push the Fed back into more free money for investors. It’s far from bringing any renewed QE relief, which is what propelled the old bad-news-is-good-news mindset. The Fed has already stopped easing, and surely everyone knows it is not going to turn around and start again this easily, after having made so much fuss about being determined to seriously tighten, or it would completely lose face.
The economy is going to keep right on breaking, which means corporate earnings are going to keep right on falling, while inflation, even if it were to back off from the roaring inferno it has become, isn’t going to give the Fed reprieve anywhere soon enough to prevent some serious blows problems tightening. Some of those problems will even be unforeseen side effects like the last repo crisis. So, the Fed is going to tighten right into recession as I’ve said it would wind up doing.
As stock legend Bill Gurley noted,
An entire generation of entrepreneurs & tech investors built their entire perspectives on valuation during the second half of a 13-year amazing bull market run. The “unlearning” process could be painful, surprising, & unsettling to many. I anticipate denial. Previous “all-time” highs are completely irrelevant. It’s not “cheap” because it is down 70%. Forget those prices happened. You may be shocked to learn that people want to value your company on FCF and earnings.
In other words, things are going back to getting real. The trip through Wonderland has ended for now, and that means reverting to the mean. Now, does this mean that I think the bulls won’t try another rally on Monday. Of course not. Never underestimate the foolishness of the bullheaded or their inability to grasp and hang on to reality; but they won’t make it far if they try. Every break through resistance of a former bottom, usually tries to test the path back up, but bulls don’t have hooves built for hanging on in this storm of economic troubles. Bears have claws for clinging. Bulls do not.
Breaking up in bonds
The damage is far from being contained just to stocks because there is no love in bonds right now either:
At -11%, this is the largest drawdown in the US bond market since 1980. Back then the 10-year treasury yield was at 12.6%. Today it’s at 2.9%.
Remember that I’ve said all along this is going to be the crash of the Everything Bubble. We’ve got a great start on that, and the Fed hasn’t even begun to tighten yet! I mean you can hardly call a ten-year yield of 2.9% tightening, especially when that leaves a real yield of about -5% after inflation. By historic standards, that kind of interest on loans sounds extraordinarily loose in terms of monetary policy to me. And the effective Fed Funds rate, running at about 0.33% today? During any other period of history, that would have been regarded as extremely loose, stimulative monetary policy — more than just “accommodative.” And a balance sheet that hasn’t gone down even the tiniest bit from being the largest central-bank balance sheet in the history of the world? A vast treasure-trove of cheaply had money supply.
Get real! You ain’t seen nothin’ yet!
So, how does the start of this year for bonds look compared to all others?
Worst in the history of JPMorgan’s Government Bond Index. That’s how! The worst! By far! And the Fed hasn’t even started catching up to what the bond vigilantes are already doing out in the real marketplace before the Fed even starts dumping its bonds into the market square.
And globally, the news is even worse! It’s already been the worst global bond bust since the 20s! And central banks haven’t even started any real tightening yet. J Powell will lead the bankster pack this week.
Bonds and equities matching this performance together? Only four times, including this one, in the past half a century. Global we’ve seen net outflows simultaneously in both stocks and bonds for three weeks. (We’ve had three consecutive weeks of outflows in equites but outflows in 15 of the past 16 weeks in bonds.) That means bonds are not functioning as a safe haven, even when money is fleeing stocks.
That’s what happens when the Everything Bubble breaks. All bubbles burst together, and that is why we are now starting to see trouble in the Fed-restored real-estate bubble, too. So, wait until we get started with actual central-bank tightening! That oughta be fun!
We’re already in a global recession, but it’s only just begun.
Can it get any worse, you ask?
Well, if you were inclined to ask such a question (and you wouldn’t be reading here if you were), let me show you how. Recalling that I said the market’s foolhardy rise on the bad GDP print would result in a nasty hangover, the Asia Times has called Friday’s floor-fall the same way:
America’s giant tech monopolies puffed the capitalization of America’s stock market to dreamland proportions, and are waking up with a hangover as the era of easy money crashes to an end.
They are even validating that all of this is happening for exactly the reasons I said we would get here throughout all of 2021:
Inflation forced the Fed to tighten, and toppled the tumescent stock market.
I mention this again because I did bet my entire blog last year on my prediction that “Inflation will kill the stock market,” so I want to note from yet another independent economic source that the blog is safe; the bet was not lost. They are calling it the same way with, of course, no knowledge or care about my bet. I said this inflation would rise to such a level as to do that by either forcing the Fed to tighten hard or by destroying the entire economy if the Fed did not tighten and end inflation.
But how much worse can it get?
Tech stocks earn only 0.7% of the S&P 500’s total revenue, but account for 12.2% of its market capitalization. This remarkable divergence of valuation might be the biggest bubble in market history.
Biggest tech bubble in history, this guy says. Well, if he’s right about that, we can see a bigger crash than the dot-com bust. The writer notes that tech stocks soared because bond yields under Fed QE plummeted for years, resulting in the birth of TINA (There Is Nothing Else). TINA is dying now because bond yields are rising rapidly. However, in the present situation, no one seems to want either of those options. Money is fleeing both markets. However, for the sake of the record, real yields on bonds right now look cozier than real yields on stocks if you just buy the treasury bond and clip coupons. With real yields on stocks having fallen 18% and real yields on bonds only falling 5%, there is something else than stocks. It’s not good, but it looks a lot better than the past HALF YEAR for stocks.
The so-called FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) are down nearly 30% on the year. Netflix is down 68% and Amazon is down 40%.
So, the generals are leading the retreat; but, at an average of 30% down, they can easily fall that much more, as they did in the dot-com bust. Therefore, as the major components of the S&P 500 and NASDAQ, they can do a lot more damage to both indices.
It could get much uglier if the US economy tips into recession.
Oops. Too late. I guess he missed the memo on that one. We already tipped into recession because I assure you — as strongly as I assured you inflation would kill the stock market bull — that we are highly likely to see another negative GDP print for this quarter, shortly after which both quarters will be officially declared (retroactively as always) to be in recession.
But how much uglier?
A combination of chronic underinvestment and attrition of the labor force after massive income subsidies left American industry unable to meet even the increase in consumer demand during the first quarter. Instead of producing more, the US imported more, mainly from China. The evidence suggests that the US didn’t produce more because it couldn’t.
Do you think that is going away with sanctions making supply-chain problems and transportation problems worse? Well, I’m going to be going into that in my next Patron Post, but suffice it here to summarize: No.
You see, the NASDAQ lost 80% of its value in the dot-com bust. Do you think it cannot do that again? Well, many thought the stock market wouldn’t fall this year, too, and nearly all the experts said the economy was strong, but here we are at minus 1.4%. It took the NASDAQ two years to erode away 80% in the dot-com bust. So far, it has a half-year downhill run, and I can lay out (and will in that Patron Post) many reasons for it to have a lot more room to run. So, we’ll get there. It will, as I’ve always said, take some time because this crack-up will be like the dot-com bust in terms of stocks, and that one took two years.
Again, how bad was the fall?
Let me close with just a little more on how bad it was … so far … from others:
A barrage of divisive economic signals, combined with plummeting technology stocks, led financial markets to close April at lows last seen when the pandemic began in March 2020.
Uncertainty about the trajectory of the economy played a role in market turmoil on Friday, as the tech-heavy Nasdaq closed down 4.2 percent for the day and the Dow Jones industrial average lost 939.18 points, or 2.8 percent. The S&P 500 tanked 3.6 percent on Friday, erasing 9.1 percent of value in April, its worst month since March 2020. And it’s down 13.8 percent in 2022, the worst start to the year since World War II.
The economy unexpectedly contracted in the first quarter, led by trade deficits and a drop in inventory purchases.
From the household level to Fortune 500 companies — start worrying about the ‘R’ word, it can become a bit of a self-fulfilling prophecy.
Listen to the Biden Admin’s spin doctors if you want, but they have an election to sell if they want to stay in real power. The actual numbers were bad, and the outlying situation is worse. The road ahead is pretty snarled:
But looming concerns about the war in Ukraine and coronavirus lockdowns in China, including supply chain snares, could end up costing the company $8 billion this quarter, Apple reported.
That’s an Appletizer for what is to come.
Amazon led market losses on Friday with a 14 percent drop, the largest one-day sell-off in 16 years. This followed a weaker earnings report, as the company posted its first big quarterly loss since 2015 this week
Amazon was the the company that profited most during the Covid lockdowns, and now it one of the ones falling the hardest. Bezos lost billions and billions in one day!
“There’s no question the market is pricing in a recession,” said Anthony Chukumba, an analyst at Loop Capital Markets. “When you see bellwethers such as Netflix and Amazon miss numbers by a country mile, that’s concerning — particularly when it’s happening in the tech space, which for so long has been the market leader.”
Meanwhile, global bonds have experienced their worst-ever month before any of the serious rate hikes by major central banks have begun. Market’s are, of course, scrambling now to price in what they believe is going to start this week, but I don’t think this is going to be a “sell the news, buy the event” kind of experience. Neither do some others … for good reason:
“Until Fed pricing has run its course and stabilizes, global yields can rise further,” said Imre Speizer, a strategist at Westpac Banking Corp. in Auckland. “Investors will be reluctant buyers of bonds as long as Fed rate pricing keeps moving higher.”
And rising bond yields only make stocks look worse as a place to park your money during a time of scorching inflation and falling stock values. Better to lose less to inflation, clipping bond coupons, thanks to some government-guaranteed yield on a sure deal than risk losing more to inflation (because of the lack of a guaranteed yield) while also losing a wobbly bet on a stock’s valuation at a time when the economy appears now to many to be sliding into the “R-word.”
“Stagflation remains our base case for the rest of the year as recession risk is increasing in Europe and central banks remaining committed to their course of policy normalization against the backdrop of very high inflation,” said Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International.
So, what I’ll be looking at in the next Patron Post is where that inflation is now likely to go because the market in its one-day flirt with a relief rally was banking on the Fed backing away from the inflation fight now that recession is staring them down with a mean and ugly look.
Reprinted with author’s permission from The Great Recession Blog