Bulls Gore Bears, Who Sharpen Claws for a Return Match

On Friday, May 20, share prices dipped into what is called bear territory, 20 percent below the previous peak. This was a very short, intraday dip, that missed the 20 percent by a bit, but it rattled investors. Wall Street zoologists say a bear market is driven by investors who expect share prices to fall, who believe that just when you think things can’t get worse, they do.

There have been 14 bear markets since 1945, lasting an average of 9.5 months. The most recent occurred In March 2020, when the pandemic began. It lasted only 33 days. Before that there had not been a sustained bear market since 2009, at the tail end of the financial crisis.

By May 20 more than $7 trillion in wealth had been wiped out by the plunge in blue chip stocks. Some 144.6 million American adults own shares, but the wealthiest 10 percent own about 80 percent. Which might explain why the emergence of a bear market ranks far down most Americans’ list of concerns, well below inflation, which affects the day-to-day living standard of almost everyone, with the possible exception of those shielded by great wealth. It is not an exaggeration to say that the rich have their eyes on the S&P 500, while the less rich have their eyes on the CPI and the gas pump. One station operator told me that prices are so high that some consumers reach the limits on their credit cards before their tanks are full, while others buy lesser amounts and return after their next paycheck arrives.

The Bears Bare Their Claws

In the middle of that week, on May 17, customers of two leading companies, Walmart and Target, told their CEOs to eat the increases in their business costs so that customers would have enough inflation-riddled dollars with which to feed their families. That meant the good old days in which companies could pass on cost increases were over. Profit margins would be squeezed. Sell, sell, sell. Shares of Walmart and Target fell 17 and 25 per cent, respectively.

By Friday, May 20, shares were flirting with bear territory, give or take a couple of percentage points. Many CEOs predicted a recession, setting up a feedback loop in which CEOs depress investors, who unload shares, depressing CEOs still more. A nightmare that produced many sleepless nights over the following weekend. But before scribblers has a chance to write about another Black Friday to mimic the day in 1929 that preceded what would be an 89 percent decline in share prices, which did not return to pre-crash heights until November 1954, a week passed.

Bulls Make A Run

By the time the markets closed on May 27 for the holiday weekend, shares were seven points short of a bear market, although still down 13 percent this year. The S&P 500 index of big-company share prices had jumped 6.6 percent. The Nasdaq 100 index of high-tech stocks, in bear territory after a 28.6 decline, rose 7 percent during the week, leaving them less deep in the dreaded bear territory to which investors, shunning profits in the sweet- by-and-by for profits in the here-and-now, had confined them.

Not bad for one week’s work. Share prices are now 80 percent higher than they were at their low point in March 2020, leaving long-term investors with no reason to feel capitalism has failed them, and a sufficient increase in wealth to upset the “progressive” wing of the Democratic party and their intellectual soulmate, French economist Thomas Piketty.

Investors, equity “guys”, traders are now ensconced in their weekend retreats, some in posh Southampton where houses rent for as much as $300,000 per week. They are socializing, to use a variant of a word not heard in that company, and replacing last weekend’s nightmares with dreams of toys they do not yet own. All thanks to the bulls that went on last week’s Pamplonian run.

Refreshed, they will try to figure out whether the bull run will continue or instead is a bear trap, a false signal of a reversal of the downtrend, or slightly worse, a dead-cat bounce, a temporary increase in prices preceding a new plunge. Forget the long-standing advice, “Sell in May and go away” before traditionally weaker summer weakness bites in. Only those strong of heart will pack up their troubles in an old Prada bags and go away.

Rumors Of Weakening Fed Resolve

It is always dangerous to hunt for the reasons for short-time major reversals in share prices, but candor compels reporting even what I deem unlikely. Some investors and analysts believe the data-driven Fed might stay its hand, and hold off on, or at least moderate future interest rate increases.

After all, sales of new houses were down 26.9 per cent in April compared with a year earlier. Prices of used cars, one of the drivers of the inflation rate, fell 27 per cent in March vs. a year earlier. Consumer sentiment is at its lowest point in a decade, perhaps foretelling a cutback in spending, especially by low-income families, fact already reported by several merchants. There are signs that what Powell calls a labor market “tight to an unhealthy level” might be loosening, as companies announce a slow-down in hiring, or no-new-hires policies, and some announce lay-offs.

And the Fed’s preferred measure of inflation, a construct that excludes food and energy prices and therefore is of minimal interest to anyone who eats or drives, eased a bit, rising at an annual rate of 4.9 per cent in April after increasing 5.2 per cent in March. That is still double the Fed’s target, but inflation fueled by trillions of dollars of federal government checks to families, including the unneedy who continued to receive paychecks by working from home, and a long period of reality denial by the Fed can’t be unbuilt in a day.

A Last Swig From The Punch Bowl

Especially when unlocked consumers are willing to accept the lowest savings rate (4.4 percent) in 14 years to fly hither and yon at fares that have been rising at a record rate (+18.6 percent in April), fill their gas tanks with $5 gasoline, and rent hotel rooms that cost more (+30 percent) than before Covid closed down travel.

More likely, the Fed will continue raising rates through next year, and in addition sell off the asset-backed bonds it has acquired, turning QE into QT, Quantitative Tightening. Honey for the bears, an espada for the bulls.

The bears have not yet hibernated.