In considering this aging bull market, some sobering facts from John P. Hussman, Ph.D., of the Hussman Funds: “Recall that the 2000-2002 [market] collapse wiped out the entire total return of the S&P 500 in excess of Treasury bill returns, all the way back to May 1996."
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Hussman adds: “The 2007-2009 collapse wiped out the entire total return of the S&P 500 in excess of Treasury bill returns, all the way back to June 1995. If the S&P 500 was to experience nothing but a run-of-the-mill 34% bear market decline over the coming three years, it will have underperformed Treasury bills for what would at that point be an 18-year period since 1999.”
Stock markets correct every three years or so in the double digits. This bull market is in its sixth year. The S&P 500 is up 202%, and the Dow has risen 171% since March 2009; the Federal Reserve’s zero bound rate policies, launched in December 2008, would have entered the first grade by now.
Markets now are no more long term than the Federal Reserve’s policy decisions, the markets have been in a through-the-looking-glass period when Wall Street has been obsessed about central bankers’ forward thinking on rates, and not CEOs’ forward thinking on earnings.
“I still believe that the attempt by central bankers to prevent the private sector from deleveraging via a non-stop parade of asset price bubbles will end in tears,” says Hussman. “But I no longer think that anyone can say when.”
That is the conundrum. Here’s Hugh Hendry at Eclectica:“There are times when an investor has no choice but to behave as though he believes in things that don’t necessarily exist. For us, that means being willing to be long risk assets in the full knowledge of two things: that those assets may have no qualitative support; and second, that this is all going to end painfully. The good news is that mankind clearly has the ability to suspend rational judgment long and often.”
The moral of the latest jobs report is, don’t expect higher interest rates to come to the rescue and bring the markets back to reality, when there’s no signs of real wage growth (notably flat at 0.2% for the month of December, since about half of new jobs are lower, paying ones). The Fed may not hike rates as much as anticipated, given that two Fed hawks are retiring - - Richard Fisher and Charles Plosser - - and two uber doves become voting members, Charles Evans and John Williams.
Already Evans has been exerting his influence over the Fed. Because annualized average hourly earnings as of December flat-lined at 1.7%—the lowest since October, 2012--Chicago Fed President Evans said last week: “I don’t think we should be in a hurry to increase interest rates.” Since last September, Evans has been counseling the central bank to be “patient” before hiking interest rates until average hourly earnings increase, the argument being salaries are the driver behind bringing price inflation back up to the Fed’s 2% target. “Lo and behold, that word [patient] appeared for the first time in the December FOMC statement last year,” notes economist Ed Yardeni. Translation: most likely we’ll see just one Fed rate hike this year of a quarter basis point.
For the last four years, the economy has grown on average about 2.3%, which is why net payroll employment of 140 million in November surpassed January 2008's 138.4 million by only a tepid 1.2%, noted columnist Robert J. Samuelson. All of those trillions of dollars of central bank and federal (taxpayer) support, and that’s what the U.S. got, as the federal government continues to vacuum up credit creation because it fully believes only government spending can reflate the economy.
When the Federal Reserve does raise rates, as it is expected to do later this year, the markets will finally adjust to fundamental economic forces that seek the “natural, fairly valued, low-interest rate that is dictated by current demand, monetary velocity, and other inescapable realities, all pressing downward until a true growth in productivity returns,” notes Commercial Bankruptcy Alternatives.
It says: “These economic fundamentals, of course, have only served as a general backdrop upon which Fed policy-making decisions since 2008 have been predicated,” central bankers’ chief focus has been on putting out fires. But those fires were put out long ago, so can the Fed justifiably continue to be the first responders to the market’s every hiccup?
The question Commercial Bankruptcy Alternatives warns us to ask ourselves is this: “What the impact of a higher-interest-rate/higher-bankruptcy-volume (equity wipe-out) environment would have on the banks, and the ‘liquidity trap’ corner we have been painted into becomes quite clear.” The U.S. and Federal Reserve bailouts have "merely delayed the bankruptcy boom,” warned the American Bankruptcy Institute’s ABI Journal.
In other words, when rates go up, the corporate zombies that should have gone bankrupt, but were kept alive by easy money, will start to march out of the woodwork (don’t say I didn’t warn you: http://www.foxbusiness.com/economy-policy/2014/10/30/zombie-land-usa/ and http://www.foxbusiness.com/economy/2012/12/13/federal-reserve-zombie-economy/).