"Winter Storm Warning"

"Winter Storm Warning"

by Brian Maher

“To everything there is a season,” Ecclesiastes informs us - winter, spring, summer, autumn. We must assume economies, stock markets - perhaps civilization itself - offer no exceptions. They too must roll in rhythm with the cycling seasons. A season may run for months. Or Years. Decades. Centuries. Today we turn our focus from the passing weather. It is the long view, the overall view - the seasonal view - that commands our attention. Economies and stock markets sprout, blossom, fade - and die. Sometimes summer extends far into autumn before letting go. And sometimes winter holds its iron grip deep into calendar spring.

Stock Market Seasons: The stock market winter of 1929 - for example - was so fierce the ice held 25 years. Only in 1954 did stocks thaw to pre-freeze levels. The years 1982–2000 - conversely - were extended summer for the stock market. Between August 1982 and December 1999, compounded real returns on the Dow Jones ran to 15% per annum. Chill northern gusts occasionally blew on in - as in 1987. But they blew out as rapidly. Investors believed they had discovered something approaching perpetual summer.

Yet summer yields inevitably to winter. Indian summer may delay winter’s onset, it is true. But soon or late, Mr. Jack Frost pays his visit. An arctic gale came barreling in, 2001–2002. Another - even icier - swept through in 2008–2009. The fiercest blast of all tore through in 2020, out of China. But the Federal Reserve dialed the furnaces to blistering levels…

Record Heat: Its record heat soon broke the ice. And today - despite recent chills - the stock market posts record warmth. Is it summer once again for the stock market? Or is it heading into a 20-year winter… similar to the 25-year winter of 1929–54?

Consider: By spring 1930, the stock market had made good many of its October ’29 losses. Thawings extended through 1931. As Jim Rickards notes: "Stocks rose 28.6% from Nov. 17, 1929 – April 20, 1930. They rose 13.2% from June 22 – Sept. 7, 1930. Stocks rallied again by 17.5% from Jan. 18 – Feb. 22, 1931. Finally, stocks rallied 22.2% between May 31 – June 28, 1931. Yet these proved fleeting thaws between deep, deep freezing-overs. Overall, the Dow Jones plunged 89.2% from 1929 – 32. Perhaps this post-pandemic recovery is merely a transient, artificial thaw.

Prepare for a Freeze: Mr. Raul Elizalde of Path Financial, writing in Forbes: "The stock market has been very generous in the past 13 years. The S&P 500 is six times higher than the financial crisis low of 2009 and every decline since proved to be an opportunity to buy. But the market generosity may have reached its limits. Historically speaking, U.S. stocks as an asset class are as expensive as they have ever been…

Adjusted for inflation, the price of the S&P 500 index is in fact higher than during the “irrational exuberance” days of the late 1990s’ dot-com boom, which was followed by a two-year dragged-out 50% slump from its peak."

Are you prepared for a 50% stock market freeze? If you are retired - or nearing retirement, you likely are not. Here is a warning of ice: And if one were to look for a reason why the next likely direction is not upward, it would be that the regime that supported increasingly expensive stocks is no longer in place. That is, the Federal Reserve is preparing to work the furnace settings back. Rate hikes and quantitative tightening are in immediate prospect. Can the market warm itself, spark its own flame? We are not confident it can.

A 20-Year Winter? Given present stock market valuations… how long might winter last? Mr. Michael Carr instructs technical analysis at New York Institute of Finance. Says he: “Starting from this level, stocks are likely to disappoint over the next 20 years.” Twenty years? That is correct:

When the P/E ratio is near all-time highs, as it is now, the S&P 500 delivers annual returns averaging about 5% over the next 20 years. When the P/E ratio is near all-time lows, returns are about three times higher, averaging 15.4% a year over the next 20 years.

Yet as we have stated before: Climate is what you can expect. Weather is what you actually get. Perhaps the Federal Reserve will back off, perhaps it will extend the summer season, perhaps it will hold the sun up in the sky a bit longer. Yet all indications run the other way…

Entering the Winter Phase: The Daily Reckoning’s Charles Hugh Smith argues winter may be closing in. Charles believes the world is now marked by “souring social mood, loss of purchasing power, stagnating wages, rising inequality, devaluing currencies, rising debt, political polarization and elite disunity.” “These are all characteristics,” Charles laments, “of the long-wave social-economic cycle that is entering the disintegrative (winter) phase.”

Charles leans on the work of historian Peter Turchin. This fellow explores historical cycles of social disintegration and integration over 50-, 150- and 200-year cycles in his civilization almanac, Ages of Discord. Turchin identifies three primary forces pushing these cycles: an oversupply of labor that suppresses real wages; an overproduction of parasitic elites; a deterioration in state finances. These cycles are as natural as the seasons - and perhaps as inevitable.

Real American wages have held essentially flat for decades. Evidence suggests the bottom half of American adults earn no more than they did in the 1970s.

An overproduction of parasitic elites? We append no comment.

A deterioration in state finances? The Treasury groans under a $30 trillion national debt that is growing - daily.

We could continue… but mercy forbids it. The Horae - the Greek goddesses of the seasons - are fickle and capricious beings. We have our winter apparel ready. Do you? More tomorrow."

- dailyreckoning.com