The Fed Can't Fool Mother Nature!

The S&P 500's rally from its March 2020 low to 13.2% of its 2020 high has been primarily fueled by the U.S. Federal Reserve's monetary stimulus. The Fed has and continues to spend trillions to provide the economy with liquidity and to artificially prop up the markets. The rally will prove to be futile and based on my calculations below the S&P 500 will have declined by 85.3% when it reaches its final bottom in Q4 2022. There is no amount of monetary or fiscal stimulus that will enable investors to escape the secular bear which replaced the 2009-2020 secular bull market on February 20, 2020.     

The stock market has been secular since its origin in 1802. Every secular bull has been followed by a secular bear and vice versa.  The minimum declines from all of the secular bull peaks to the secular bear troughs have been 60%. Secular bulls and bears are the nature of the stock market. You can't have one without the other.

Secular bulls and bears are defined by "public," or consumer, sentiment. Investor sentiment is completely irrelevant to a secular bull or bear. Neither government fiscal or central bank monetary stimulus changes the mood of the public from negative to positive.  

The blue line in the chart below depicts the growth trend for the Dow Jones index over the last 101 years. The 7.5% growth trend is equivalent to the sum of the percentage changes for population growth and inflation. For those periods in which the public is optimistic, such as the roaring twenties, the index for an extended number of years above the trend line. When the public becomes pessimistic, as was the case after the 1929 crash, Dow trades for an extended number of years below its 7.5% trend line.

The 1949 to 1966 bull in the above chart was due to the public becoming optimistic after the end of World War II. The 1966 to 1982 secular bear included the Vietnam war, interest rates of 20%, the highest inflation rate since the Civil War, and the first and only resignation of a US President.   

The circumstances around the crashes of the markets from their 2020 all-time or multi-year highs and the ensuing collapses for the economies of the US and 12 other countries are eerily similar to the US' 1929 crash. The crash of 1929 resulted in the U.S. unemployment rate surging by 400% from September 1929 to March 1930 and doubling to 800% in September 1930. Similar to 2020, the President and U.S. government in 1929 were proactive to mitigate damage to the economy. Despite the enactment of fiscal stimulus consumers still cut back their spending. See 1929 and 1930 excerpts from Herbert Hoover Presidential library archives:


1929

"After the stock market crash, President Hoover sought to prevent panic from spreading throughout the economy.  In November, he summoned business leaders to the White House and secured promises from them to maintain wages.  According to Hoover's economic theory, financial losses should affect profits, not employment, thus maintaining consumer spending and shortening the downturn.  Hoover received commitments from private industry to spend $1.8 billion for new construction and repairs to be started in 1930, to stimulate employment.

The President ordered federal departments to speed up their construction projects and asked all governors to expand public works projects in their states. He asked Congress for a $160 million tax cut while doubling spending for public buildings, dams, highways, and harbors.

1930

Praise for the President's intervention was widespread; the New York Times commented, "No one in his place could have done more. Very few of his predecessors could have done as much."  Together, government and business spent more in the first half of 1930 than in the entire previous year. Still consumers cut back their spending, which forced many businesses and manufacturers to reduce their output and lay off their workers.

The common denominator for 1929 and 2020 crashes and collapsing economies for the US and a dozen other countries is what separates them from all of the other notable market crashes. That pivotal piece is the extreme and immediate polar opposite change in sentiment for an entire population within days of a crash commencing.

Consumer sentiment went from extremely positive with unemployment at an all-time low in 1929 to extremely negative by the beginning of 1930. The University of Michigan's recent US consumer confidence survey is a great example. The chart below depicts the sudden and significant decline in consumer confidence in April 2020 as compared to February 2020's reading which was the highest since 2002.

Consumers worldwide are becoming increasingly pessimistic and are retrenching due to their concerns about being infected with the Covid-19 and also about losing their jobs. The chart below depicts the 500% increase in U.S. unemployment from February 2020 to April 2020.

The recovery from the fears of pandemic job losses will likely take years for consumers to overcome.  Thus, the probability is extremely low that consumer sentiment will reverse from extremely negative to even somewhat positive in the current decade.   

Investors should anticipate that the PE multiples for all shares will contract to near historical lows by 2022. The chart below depicts the contractions and expansions of the PE multiples of the S&P 500 for the 1966-1982 secular bear and the 1982 to 2000 secular bull markets respectively.   For seven of the 16 years for the 1966 to 1982 secular bear PE multiples were below 10 and the PE bottomed at 6.79 in 1980. The 1982 to 2000 secular bull the PE reached a high of 34 in April 1999.  The fall of the Berlin Wall and China opening its economy in 1990 resulted in the 1982-2000 secular bull being the longest ever since 1802.

The chart below depicts the S&P 500's earnings and PE ratios from December 31, 1927, through December 31, 1932.  The index's earnings reached a 12 year high of $24.16 on December 31, 1929, and then declined by 66% to $8.08 on December 31, 1932.  The high for the S&P 500's PE multiple was 20.2 in September 1929 and low was 9.3 in June 1932.

Assuming the S&P 500's 2019 peak to 2022 trough earnings mimic the 66% decline from 1929 to 1932 its earnings will fall from $162.93 at 12/31/2019 to $53.77 in late 2022. Assuming a low PE equivalent to 1932's low of 9.3 the index based on its earnings will reach a low of 500.06.  From the S&P 500's 2020 high of 3393.52, the index will have declined by 85.3% when it reaches its final bottom.

The S&P 500's final bottom low and percentage decline from its high prediction are further supported by the SCPA (Statistical Crash Probability Analyses) algorithm's forecast. The SCPA has forecasted 31-month journeys for the markets of the countries to their final October to December 2022 bottoms which will be 79% to 89% below their 2020 highs.  

The SCPA's 2020-2022 market gains forecast is based on the findings from the empirical research of the Dow 1929-32 and the NASDAQ 2000-02 market crashes.  

SCPA (Statistical Crash Probability Analyses) is forecasting a 100% probability for the following post-crash of 2020 events:  

 The table below contains the SCPA's initial forecasts that were made in March 2020.  All four of the precise forecasts were accurate.

The SCPA and another of my algorithms, the Bull & Bear Tracker (BBT) which complement each other are capable to produce aggregate gains of 500% through 2022. The Bull & Bear Tracker which is in the market 24/7 and for 365 days a year monitors the markets for bullish and bearish trend changes. For March of 2020, the BBT's signals produced a gain of 29.3%. For April the BBT's signals produced cash gains of 15.1%. See "April 2020, Bull & Bear Tracker's 10th consecutive profitable month".

For the potential gains that can be produced by the SCPA and BBT algorithms requires active management of the signals by a registered investment advisor who has been approved to trade the BBT's signals. To be referred to a registered investment advisor click here.

To view my 3:44 second video about Secular Bulls and Bears click here. Read my March 31, 2020, article entitled "Embrace the Bear" to learn about:

  • investing strategies that are best utilized during bear markets

  • investing in the shares of inverse ETFs which go up when the market goes down

  • algorithms including the Bull & Bear Tracker and SCPA which are being utilized by investors.   

    The video of my "Secular Bulls & Bears: Each requires different investing strategies" workshop at the February 2020 Orlando Money Show is highly recommended. The educational video explains secular bulls and bears and includes strategies to protect assets during secular bear markets and recessions, etc.  

    BullsNBears.com which covers all of the emerging and declining economic and market trends is an excellent resource site.  Click here to view a one-minute video about the site. A strategy to liquidate all mutual fund holdings and stocks above $5 should be deployed immediately. Time is of the essence. To understand why diversification does not work and why penny and low-priced stocks should be held watch MoneyShow workshop video.

(CapitalWatch has no positions in any stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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