I’m sure that many METARs are breathing a sigh of relief since their stock portfolios have rebounded so nicely starting in early June.
Zeelotes, one of the smartest Fools, has posted about this in a couple of excellent posts in this thread on Saul’s Board. Personally, I hate roller coasters. My poor nerves couldn’t stand this kind of volatility.
https://discussion.fool.com/just-a-little-catch-up-35151580.aspx…
Does the recent stock market rebound make sense? Will it turn into a genuine bull market?
https://www.wsj.com/articles/peloton-rivian-amc-gamestop-sto…
**Don’t Let This Irrational Stock Rebound Make You Insolvent**
**The rapid rebound in some of last year’s favorite stocks doesn’t make much sense, but that’s totally normal in a bear market. Make sure you don’t start ‘anchoring’ on what those pandemic darlings did before.**
**By Spencer Jakab, The Wall Street Journal, Aug. 12, 2022**
**...**
**Wall Street veteran Gary Shilling said, "the market can remain irrational longer than you can remain solvent” 36 years ago. He is now 85. He has some opinions about how rational the recent stock market rebound is: After the mildest of bear markets, the hardest-hit companies, many still unprofitable, have been leading a recovery the past eight weeks. Dr. Shilling is skeptical, saying stocks never reached their “puke point” — a stage of despair that serves as the basis for a sustainable rebound.....**
**As the 2½ years it took for the tech bubble to hit bottom shows, the unwinding of a retail-led mania doesn’t happen all at once but is instead punctuated by premature bargain-hunting. He sees the S&P 500 eventually bottoming 40% below its peak, requiring another 30% selloff from today’s level. For what it is worth, he almost exactly predicted the bottom of the 2007-2009 bear market....** [end quote]
I have two serious Macroeconomic concerns that neither of these worthies mentioned.
- The Federal Reserve will be under tremendous pressure to stop raising interest rates. The bond market is already betting on the Fed beginning to cut in mid-2023. The pressure to cut can already be seen from this week’s one-month CPI pause in inflation (though many other indicators are strongly inflationary).
This is similar to the 1970s, when the Fed raised and cut and raised and cut. The recession and bear market of 1974 and oil price-caused inflation wasn’t helped by the Fed’s policies. Inflation expectations became entrenched. Inflation kept coming back until Paul Volcker stomped it out.
This inflation-adjusted chart of the S&P500 shows the nasty ups and downs of the 1970s until the final low in 1982. Those wicked head-fake updrafts caught many investors. Is this happening now?
https://www.macrotrends.net/2324/sp-500-historical-chart-dat…
- The other Macro problem is the zombie companies which only survive due to negative real interest rates. If the Fed really adopts a neutral fed funds rate, as they say they want to do, the real bond market will be free to price debt rationally. The Fed says that 10% of listed companies are zombies. In a recession with rational bond yields (which hasn’t happened since 2000) many of these zombies could default. This risk isn’t priced into the markets yet – the stock or bond market.
Wendy