Since the 2008 recession, financial markets have set numerous eye-popping records. In credit markets, two circumstances stand out. Negative yields employed by several central banks and the duration of real negative rates by numerous countries.
The easy money has spurred equity rallies across the globe. In the U.S., countless stock market records have fallen. Shattered benchmarks have become so commonplace, investors shrug at the news that previously piqued interest. They’ve been deceived. From plants to animals to warfare, deception is a common survival trait. Markets are no different. Soon a whole generation of self-righteous day traders, speculators, and money managers will fall prey. Conditioned, they subscribe to a collective viewpoint. Don’t worry. Be happy. “Buy the F***ing Dip.” (BTFD)
Sleepy for two decades, equities exploded in the early 1980’s. With the advent of stock index futures and options, confidence swelled and volumes rose exponentially. Then came the first test of the modern market; the 1987 stock market crash. Down 22% in one day, a full one-third off its highs just two months prior, the market’s integrity had never been tested to such a degree. Many expected another depression but it didn’t happen. Instead, the markets weaved higher and even another “mini-crash” on Friday, October 13, 1989, failed to impede the markets march upwards.
The trend would continue. An Asian currency crisis and the spectacular implosion of the hedge fund Long-Term Capital Management spooked markets. The dotcom bubble was followed by the 9/11 terror attack and between September 1, 2000, and July 2002, the S&P 500 index value was nearly halved. In each instance, investors who stayed the course were richly rewarded.
Then twenty years after the bull run was first tested in the 1987 crash, shareholders were severely challenged again. After new highs were recorded, volatility ramped up in the summer of 2007. Wild swings became routine. Within a year, the worst economic downturn since the 1929 Great Depression destroyed markets.
By March of 2009, the S&P 500 index price was cut by more than half. Patience and faith rewarded long-term investors again. Bottom feeders would get rich. Four years later, markets made new highs. By the end of 2014, prices would exceed the 2009 lows by threefold.
Over the next few years, every dip attracted fresh buyers. New highs were made in the summer of 2016. Post-Election, prices exploded worldwide. In 2017, over thirty countries stock indices outperformed the S&P 500 impressive gain of 22.3%. The world average was a positive 28%. Record after record was smashed. Seventy-one times the Dow Jones Industrial Average made new highs. Volatility was the lowest in history.
Until February 2018, the Dow Jones Average traded above its 50-day moving average for 179 straight sessions, the third longest in history trailing previous marks of 219 and 222 set in 1954 and 1950 respectfully. Even more remarkable, before the current turbulence, the S&P 500 index went 404 trading days without a decline of more than 5% from its highs. Currently, the S&P 500 index has closed higher fifteen consecutive months.
Ten years of painless money helped fuel the 35-year old bull market. Those days may be over. In the past few months, interest rates, especially short-term rates have rocketed higher. US Treasury bills are at their highest levels in nine years. The spread between the 30-year and 10-year rates are the tightest since 2007.
Despite the increases, negative real interest rates are still in effect and have been for 116 straight months (Fed funds – Core CPI). The previous record was 39 months in the early 2000’s. Yet, substantially higher yields in America have not supported the dollar. The dollar’s value recently dropped to a three-year low, down more than 10% against a basket of currencies.
Perhaps the most perplexing credit market phenomenon is the reversal in short-term yields between Greece and the United States. In the summer of 2015, 2-year yields in Greece approached 34% versus 0.62% in the U.S. Today, U.S. 2-year T-Bills top 2% while Greek 2-year yields hover around 1.25%. Let that sink in.
Ominous signs are everywhere. The flattening yield curve suggests any burst in inflation will be temporary and faster GDP growth in coming years is a fantasy. Jobless claims are at a 45-year low, yet personal savings have plummeted to 2007 levels. Eight years of economic expansion and job gains have yielded little to consumers; consumer credit default indices continue to inch up while budget deficits grow.
Startup funding defined by the TechCrunch Bubble Index plunged 8% last month and is now at 2010 levels. After an extended period of excruciating low volatility, huge market swings have returned. At a reading of 34, the much-noted CAPE index hangs over every participant’s head. And yet, despite so much positive economic news, real negative rates exist in over a dozen key nations. Outright negative yields still prevail in Switzerland, Sweden, the Eurozone and Japan. This is not normal.
What is normal? Deception. The false sense of security to stay the course. Being told by professionals’ market timing is impossible. To invest regularly and dollar cost average. The market always rebounds. To BTFD.
In his 1861 novel Silas Marner, George Eliot perfectly described the trap for those buying at the dip:
“The sense of security more frequently springs from habit than from conviction, and for this reason it often subsists after such a change in the conditions as might have been expected to suggest alarm. The lapse of time during which a given event has not happened is, in this logic of habit, constantly alleged as a reason why the event should never happen, even when the lapse of time is precisely the added condition which makes the event imminent.”
Nothing lasts forever. Especially one-trick investment strategies. It took 25 years for the Dow Jones Industrial Average to regain highs made in 1929; 35 years for the Dow Jones Utility Index. Japan peaked nearly 30 years ago—and is still nowhere near its pinnacle.
When the Dow Jones Industrial Average recently topped 24,000, many worried about the market’s frothiness. Two months later, after the market roared to 26,600 and its subsequent selloff, the BTFD herd considers 24,000 a bargain.
A whole generation has been conditioned. Don’t worry. Be happy. Buy the f***ing dip.
Photo Credit: Herval.
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