Bear Market in Sight

Recent market turmoil has been noted by investors, which is not surprising since a 20% fall in stock prices is hardly likely to go unnoticed. The recent bounce back registered Friday, the last day of November, may induce sanguine Wall Street addicts to think that the losses in November were only a hiccup along the steep road to Nirvana, where stock prices reach up to the heavens and then beyond deep out into space.

On the one hand there are indications that the US economy is doing well. Rail freight volume is up, and that is an important indicator. On the other hand there are negative figures from the housing market, which is basic to the economy. The dollar index is not necessarily an indicator of a strong economy as it is strongly dependent on Forex movements and may only show that the global economy is weakening if the US dollar gains in value.

Many market observers have begun commenting on the high levels of corporate debt and the possibility of an increasing number of defaults in the high-yield bond market, particularly for the oil industry as the price of crude oil has very recently fallen to around $50 a barrel. That is bad news for the frackers, who are deeply indebted and need higher oil prices to be able to serve their debts.

With the Fed apparently still intent on another interest rate hike in December and possibly two more in 2019 to reach a “neutral” interest rate of around 3%, it is highly likely that credit will tighten considerably. A credit crunch is dangerous for the economy because companies have become accustomed to easy credit at low rates in order to finance huge stock buyback programs. If there are meager profit margins resulting from an economic slowdown, and emerging markets seem to be slowing down according to various indicators, then US companies may find that stock buyback programs will have to be postponed. That will bring about a fall in equity prices.

The conclusion is that the Friday bounce may be short-lived even though there may be a Christmas rally to spread some cheer and joy before the end of the year. But the day of reckoning draweth nigh when debts will have to paid or at least rolled over, and that is the rub. Interest rates will be higher, and it will be more costly to service all the debts that contributed little to strengthening companies and preparing them for the lean years ahead. Beware of lean cows.

Walter Snyder


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