3 Bear Markets - An Explosion
Bears love to mention how the economy is due for a recession and the stock market is due for a collapse.
That’s a mistake because there have been a few slowdowns and technical bear markets this cycle. Technically, there is no numerical definition of what makes a recession.
Some people claim a recession is 2 quarters of negative GDP growth, but that’s wrong. If growth needed to be negative for there to be a recession, there would almost never be global recessions. Growth simply needs to be below its potential. Slowdowns are also when growth is below where it could be.
The differentiation is recessions are more broad-based, meaning they effect the whole economy.
Looking for another 2008 financial crisis just because there hasn’t been a recession for about 10 years is a big mistake. The economy is probably in its 3rd slowdown of this expansion. It hasn’t been as smooth sailing as the bears portray.
The consumer isn’t leveraged enough to catalyze a full blown recession. A global financial crisis like the one in 2008 won’t happen anytime soon. That was like a 1 in 100 year event.
3 Bear Markets - The stock market isn’t due for a bear market because it just had one.
Stocks don’t always fall 50% during bear markets. Corrections of that size are very rare.
As you can see from the chart below, there have been 3 small bear markets since the financial crisis. This chart uses intraday highs and intraday lows. S&P 500 fell over 20% in 2011 and 2018. Dow never fell 20%. Nasdaq also fell over 20% in 2011 and 2018. Russell 2000 fell over 25% in 2011, 2015-2016, and 2018. This shows the issues surrounding the definition of a bear market.
The recession definition is vague, and the bear market definition is specific. Both show how the economy and stock market haven’t been on a perfect run in the past 10 years. The stock market certainly has done well in 2019. However, it’s in need of 5% decline, not a 50% one.
3 Bear Markets - MBA Applications Fall
Many investors are counting on the housing market to rebound in the spring. If it doesn’t, the economy will probably experience weaker growth than last year.
It’s notable how much the consumer carried the economy because real residential investment fell every quarter. Since the consumer is strong, lower house price growth should be enough to turn around the market. The question is how much of a decline in price growth and mortgage rates is enough to accelerate demand.
It looks like the decline in rates caused an initial burst in applications in January, but there have been a few weak reports in February and March since then.
In the week of March 1st, the MBA applications index fell 2.5%. That occurred on top of the 5.3% increase from the previous week. Purchase index was down 3% after increasing 6%. Refinance index was down 2% after increasing 5%. Year over year gain in purchase applications was only 1%.
The refinancing share of mortgage activity fell 0.4% to 40%. I mostly care about the purchase applications because they are a leading index for the housing market. Refinancing is low historically. Even though rates are historically low, they are much higher than the recent record low.
Average loan size for purchase applications increased to a record high. That means high end buyers are getting in early for the spring housing market. That doesn’t necessarily mean house prices are soaring.
We want to see demand for more affordable housing rise to continue the increase in the homeownership rate. This would cause the houses in the pipeline to be built. That would push up real residential investment growth after its terrible run in 2018.
3 Bear Markets - Jobless Claims Fall
Jobless claims in the week of March 2nd fell 3,000 to 223,000. That missed estimates for 220,000. Claims were revised 1,000 higher in the previous week. This decline caused the 4 week moving average to fall from 229,250 to 226,250.
Those who predicted a disaster for stocks because the 4 week jobless claims hit a one year high are eating crow as the 4 week average has plummeted. It is down 9,750 after peaking 2 weeks ago at 236,000.
On a year over year basis, the 4 week average of claims are up 0.7%. They were up 3.9% 2 weeks ago. Since the post recession period, the highest year over year growth was 7.8% growth in September 2017. There needs to be a more sustained increase before I’m concerned. I don’t think it implies there will be an immediate problem if the bottom last year is the low for the cycle.
Continuing claims fell 50,000 in the week of February 23rd to 1.755 million. The 4 week average increased 15,000 from January’s close to 1.767 million. The unemployment rate for insured workers fell back to 1.2% after increasing last week.
3 Bear Markets - Fed’s Beige Book
On Wednesday, the Fed’s Beige Book stated half the country saw fallout from the 35 day government shutdown. 10 of the 12 Fed regions reported slight to moderate growth.
Only Philadelphia and St. Louis reported conditions were flat. That’s consistent with the terrible Philly Fed manufacturing reading from February.
Those who follow ‘Dow theory’ believe the transports signal where the economy is headed. On CNBC, the CEO of United Airlines stated he’s not seeing an economic slowdown.
People buy plane tickets 30-40 days in advance, so he has an early look at the economy. United Continental stock is underperforming this year as it is up 1.9% since January 1st.
Fed usually likes to get out ahead of every big meeting so that the news doesn’t drop all at once and shock the market. In the case of the March meeting, the Fed has dropped clues on when it will finish the balance sheet unwind (later this year). Its rhetoric suggests it will guide for no rate hikes or cuts in 2019. That policy could change, but not by the March meeting which is in 12 days.
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