Third Leg Down- History Repeating?

[IRQVET]

Interesting article on bear markets on their 3rd leg down, and what history has told us.

https://www.marketwatch.com/story/s-p-5 ... eid=yhoof2

[Tomanyiron]

“Where this bear market ultimately bottoms is anyone’s guess, and events outside of the Fed’s control will likely play a role in where the market finally ends up,”
The Fed's inflation expectations are still high. And it looks the 'Inflation Reduction Act' is doing just the opposite. Any benefits to people will be eclipsed by the higher prices on everything else. Reckless printing of money causes high inflation, "follow the science".

[harpole]

Yep, could get really bad. I may have to stop my buy/hold strategy, as the Fed wants "more pain".

https://www.zerohedge.com/personal-fina ... inue-slide

It seems people must lose their jobs in order to lower inflation and that's unfortunate. The government causes lots of our problems. Seems so simple to me..... Give us less government.


But, the market will do the opposite of what we think it will do. Lots of people are scared (including me), so is it time to be greedy? Or is it too soon?

[bloobs]

Yep, could get really bad. I may have to stop my buy/hold strategy, as the Fed wants "more pain".

https://www.zerohedge.com/personal-fina ... inue-slide

It seems people must lose their jobs in order to lower inflation and that's unfortunate. The government causes lots of our problems. Seems so simple to me..... Give us less government.


But, the market will do the opposite of what we think it will do. Lots of people are scared (including me), so is it time to be greedy? Or is it too soon?

I bailed yesterday at considerable loss (by my standards) because I think:
- one of the factors for capitulation is a very high VIX, which even at <30 today is still too low
- along the same lines, the fear and greed indicators still are still NOT ALL in fear/extreme fear levels
- markets tend to overreact so S&P at 3700 as the next stop may not be low enough for this present drop to cease
- bond market (HYG), historically smarter than the equity market, has been flashing a get out now signal for weeks that i just ignored

Overall, I agree that the Fed's hikes are necessary for the long-term economy in general and even the stock market specifically, but I disagree that one of their indicators used are the unemployment rate and wage levels. They should just focus on assessing good/services prices and tamping consumer demand with higher credit rates.

[harpole]

Good point bloobs; the VIX will likely skyrocket when true capitulation takes place. It hasn't happened yet (actually down right now ), which scares me.

I just started investing during the 2008-09 crash, so didn't have enough money to worry about back then. Now is a little different. Wish I could be one of those who doesn't pay attention to the market and just keeps investing as usual.

[chadwick84]

Yep, could get really bad. I may have to stop my buy/hold strategy, as the Fed wants "more pain".

https://www.zerohedge.com/personal-fina ... inue-slide

It seems people must lose their jobs in order to lower inflation and that's unfortunate. The government causes lots of our problems. Seems so simple to me..... Give us less government.


But, the market will do the opposite of what we think it will do. Lots of people are scared (including me), so is it time to be greedy? Or is it too soon?

I bailed yesterday at considerable loss (by my standards) because I think:
- one of the factors for capitulation is a very high VIX, which even at <30 today is still too low
- along the same lines, the fear and greed indicators still are still NOT ALL in fear/extreme fear levels
- markets tend to overreact so S&P at 3700 as the next stop may not be low enough for this present drop to cease
- bond market (HYG), historically smarter than the equity market, has been flashing a get out now signal for weeks that i just ignored

Overall, I agree that the Fed's hikes are necessary for the long-term economy in general and even the stock market specifically, but I disagree that one of their indicators used are the unemployment rate and wage levels. They should just focus on assessing good/services prices and tamping consumer demand with higher credit rates.

I would have to disagree with getting out. The time to get out was months ago. While the market could still go down, do you think that most the rate hikes are already in? I do. After this 75bps, I don't think well see another. As economic data gets worse, the fed will be less able to keep increasing.
My point is, do you think the fed is peaking on interest rates? If so, bottom is close. You get out before the fed introduces pain, not after. Now that pain is in the market, the fed is close to done adding more. Once the market realized the fed is done, market will rebound. Black swans with Russia and China exists, they always do. But if Russia resolution, market rebounds. Supply chains ease, rebound. Unemployment increases (already is), market rebounds. Housing falls (already bigger decline than 2009), market rebounds.

[12squared]

I may have to stop my buy/hold strategy, as the Fed wants "more pain".

Buy & Hold to Sell & Fold?

[bloobs]

I would have to disagree with getting out. The time to get out was months ago. While the market could still go down, do you think that most the rate hikes are already in? I do. After this 75bps, I don't think well see another. As economic data gets worse, the fed will be less able to keep increasing.
My point is, do you think the fed is peaking on interest rates? If so, bottom is close. You get out before the fed introduces pain, not after. Now that pain is in the market, the fed is close to done adding more. Once the market realized the fed is done, market will rebound. Black swans with Russia and China exists, they always do. But if Russia resolution, market rebounds. Supply chains ease, rebound. Unemployment increases (already is), market rebounds. Housing falls (already bigger decline than 2009), market rebounds.

You're coming at it from a qualitative point of view, which is fine if it's worked for you.

For me, it's a probabilities game. That's how I make decisions. It has to be because, as we all know the market, always behaves irrationally and there are many, many factors to be considered. So my method assumes you should never make decisions based on absolute assumptions (e.g. 100% likelihood outcomes):

To that point I cannot make decisions based on these types of absolute statements:
"After this 75bps, I don't think well see another (rate hike)" , "if Russia(n War resolves), market rebounds", "Supply chains ease, rebound", "Unemployment increases (already is), market rebounds", "Housing falls (already bigger decline than 2009), market rebounds".

My answer to the above assumptions are "maybe"--based on empirical history. I'll assign a likelihood number to it instead. For example, right now, as the S&P enters the 3700 support range, there is roughly a 33% chance it'll bounce back up to the next resistance level, 33% chance it'll trade sideways short-term to consolidate, and a 33% chance it'll keep dropping down to test the YTD lows. By selling now, the worse outcome for me would be the 33% chance it bounces up while I sit in cash--but a 66% chance I'll be no worse than those who stayed in equity funds.

Regardless, let's say the market does rebound when housing news gets out, no one will know exactly WHEN and for HOW LONG and most importantly HOW DEEP the market will continue fall AFTER the news gets out, except several weeks and months after it actually has rebounded, confirming the trend. Making as assumption prior to this confirmation is a risk.

[jimmyk]

I throw this out there for consideration. I don't know anything more than the rest and making market predictions is pretty much a fool's errand. But I will play the game.

https://seekingalpha.com/article/151563 ... -7-percent
from the article:
“The Fed is targeting 2% inflation. The long-term spread between 10-year Treasuries and CPI is about 2.5% (the "real rate"). That gives 4.5% as a probable target for the 10-year bond.”

If this is believable (I don’t have access to the entire article but appears to be supported with FRED data (St. Louis FED data)

Then the chart below applies
https://finance.yahoo.com/news/morgan-s ... 11741.html


We know PE = Price/earnings

S&P 500 currently has a PE = 16.3. S&P closed at 3389 (price as of 9-19-2022).

That gives an Earnings of: 3389/16.3 = $207
From a general check:
https://www.multpl.com/s-p-500-earnings/table/by-year

For 2022 S&P 500 earnings = ~$203 Pretty close to calculated above.
So earnings is roughly $203 to $207 per share for all the companies in the S&P 500.

From the chart above. If Fed is targeting 4 to 5% interest rate (say 4.5%) for 10 yr bond then the P/E goes lower. (assuming the curves on this chart are accurate which I believe they probably are)

At 4.5% interest rate PE = ~14

Then price = PE * earnings = 14*203 = 2842
Or PE * earnings = 14*207 = 2898

So (3389-2842)/3389 = -16.1 %
Or (3389-2898)/3389 = -14.5%

Rough calculation is the S&P 500 has another 15-16% drop if FED follows through on this scenario. Throw in your black swans, flying pigs, and double spinning candlesticks and good luck.

[bloobs]

jimmyk, where are you getting the 3389? The S&P closed at 3885 on the 19th. Regardless, how does that affect your predicted valuation?

[jimcasada]

I'm thinking of maybe of getting back in soon. The Fed really didn't do anything that wasn't expected. If you've been listening to Powell's recent comments, there's really was no surprise there too. I think maybe we can just wrap this week up to reality setting in. The US as compared to most other 1st world countries is actually in pretty good shape. Where else are you going to put your money?

[jimmyk]

Bloobs Thanks for the catch.

3885/16.3 = $238.3 which is a little higher than the charts.
Then using the same scenario of a 4.5 % rate = PE ~14
14*238.3 = 3336.2

(3885-3336)/3885 = -14.1 %

Again, this is all guessing. Lots of levers in there that get pulled or not along the way depending upon economy, how fast the FED gets to their target or if they decide to adjust.
Same can be done for S fund. I don't think it is any better.

[jimmyk]

JimCasada-
I suggest the new mutual fund window!!!!!

[bloobs]

Bloobs Thanks for the catch.
....
This is all guessing. Lots of levers in there that get pulled or not along the way depending upon economy, how fast the FED gets to their target or if they decide to adjust.
Same can be done for S fund. I don't think it is any better.

No problem jimmyk. I do appreciate your hypothesis (which Mr. Shiller would be proud of) that the market must eventually come down even for a brief second (at capitulation) to match the PE "fair" value.

The concern I have is that from looking at the historical S&P charts, it took a decade from 2001 (PE top of 44) to get to the 2008-2009 low (PE "fair value" of 15). Over eight years in fact. Since the last PE top was reached just LAST year, the next PE fair value low may not happen until 2030. What could this mean? To me, I wouldn't wait for the 15% drop to happen before the next midterm bull run begins....or the market stagnation would persist through 2030. Roll the dice.

[harpole]

I may have to stop my buy/hold strategy, as the Fed wants "more pain".

Buy & Hold to Sell & Fold?

I'm still fighting my internal TSP demons! I did well most of this year, so at this point I might as well hold.
But, premarket looks HORRIBLE....