Fri. Jan 28th, 2022

Next bear market, when will be the next bear market?  3-Things will tell you
FRIENDLY VERSION OF THE PRINTER

The question I have most often is: “When will the next bear market be?” Three specific elements tend to predict bear markets and recessions with some accuracy.

However, before reaching these points, a “Bear market” requires excesses that need reversal. In other words, you need an event that reverses on average “Fuel.” Several measures suggest that the excesses are enough to fuel a significant investment.

Long-term deviation of means

Next bear market, when will be the next bear market?  3-Things will tell you

Patrimonial property of the home

Next bear market, when will be the next bear market?  3-Things will tell you

Margin debt

Next bear market, when will be the next bear market?  3-Things will tell you

It is important to note that none of these measures means a “Bear market” is imminent. Instead, it requires a catalyst to bring about a change in feeling “Greed” a “For.” As noted, three indicators historically indicate when the “The clock is ticking” in the next bear market.

Next bear market, when will be the next bear market?  3-Things will tell you

Performance curve

The yield curve is one of the most important indicators for determining when a recession and a subsequent bear market are approaching. The following graph shows the percentage of yield curves reversing of 10 possible combinations.

Next bear market, when will be the next bear market?  3-Things will tell you

Investors should never reject the message sent by the bond market. Bonds are essential for their predictive qualities, which is why analysts pay close attention to U.S. government bonds, specifically to the difference in their interest rates. Why is that?

Unlike stocks, bonds have a finite value. At maturity, the lender receives the principal along with the final payment of interest. Therefore, bond buyers are aware of the price they pay today for theirs come back tomorrow. Unlike an equity buyer who assumes “Investment risk” a bond buyer is “Loan” money to another entity for a specific period. Therefore, the “Interest rates” it takes several into account “Risks”

  • Default risk
  • Risk rate
  • Inflation risk
  • Opportunity risk
  • Risk of economic growth

From the the future return of any bond, on the date of purchase, can be calculated up to 1/100 of a penny, a bond buyer will not pay a price that generates a negative return in the future. (This means a holding period until maturity. A negative return can be acquired on the basis of trading if expectations are that benchmark rates will decline further.)

Therefore, since the bonds are loans to borrowers, the interest rate of a bond is tied to the interest rate environment in effect at the time of issue.

Therefore, there is a high correlation between the rates, the economy and the prices of long-term assets. Oil prices, trade tensions, political uncertainty, the dollar, credit risk, income, etc., are reflected in the interest rate of different loan maturities.

What a performance curve matters

The importance of the performance curve depends mainly on who you ask.

Jeffrey Gundlach of DoubleLine Capital observes the 2-year versus 5-year differentials. Michael Darda, chief economist at MKM Partners, says this is the 10-year, 1-year differential. Others say yields at three and ten are the most important. The most viewed is the ten-year differential versus the two-year differential.

So what is it? As discussed in “Which performance curve matters:”

“The best signs of recession have occurred when a large portion of yield differentials have been negative simultaneously. However, even then, it was a few months before the economy went into recession.

Following the “Dot.com” accident, the whole tragic event was considered an anomaly, a once every 100 years this would not be repeated. Unfortunately, only four years later, in 2006, investors were again told to ignore investing in the yield curve, as it was. “Goldilocks Economy” i “Subprime mortgages were contained.”

Tips for ignoring yield curve investments have not worked well for investors.

The following four-panel graph shows the 4 previous periods in which 50% of 10 different yield curves were invested. I have drawn a horizontal red dashed line where 50% of the 10-yield curves we follow are inverted. I have also indicated the optimal point to reduce the risk in relation to the subsequent minimum.

Next bear market, when will be the next bear market?  3-Things will tell you

In all cases, the market rose slightly after the initial reversal before the eventual reversal.

Next bear market, when will be the next bear market?  3-Things will tell you

There is no investment yet

The following graph is the percentage of 10-yield spreads currently invested. At the moment, that number is zero, suggesting that there is no risk of recession or “Bear market“. However, as you will see, when investments occur, they tend to occur quickly.

Next bear market, when will be the next bear market?  3-Things will tell you

Historically speaking, from the moment the yield curves begin to reverse, the lapse of the next recession lasts approximately 9 months. Keep in mind, however, that performance curves are currently narrowing, suggesting that economic growth will weaken. If this trend continues, another “Investment” it would not be a surprise.

Next bear market, when will be the next bear market?  3-Things will tell you

Given the strong history of predicting recessions historically, when the subsequent investment occurs, the media will quickly dismiss it as they did in 2019.

They will probably make a mistake again.

Next bear market, when will be the next bear market?  3-Things will tell you

Fed Taper

Recently, the Federal Reserve said yes “Think about thinking about reducing intensity” their bond purchases. However, the issue of “Reduced” it’s not so much about the actual reduction in Fed bond purchases as it is about psychology.

“The key to navigating quantitative ease. and the Fed’s policy in general is to recognize that its effect on the stock market depends almost entirely on the speculative psychology of investors. See, as long as investors tend to speculate, they treat zero-interest money as a lower asset and will pursue any asset with a return above zero (or with a past record of positive returns). Valuation does not matter because the investor psychologically rules out the possibility of falling prices in the first place. – John Hussman

In other words, “QE” it is a mental formation. Thus, the only thing that alters the effectiveness of the Fed’s monetary policy is the very psychology of investors.

Such was one pointed out in the “Stability / Instability Paradox”.

“With the entire financial ecosystem now stronger than ever, due to the Fed’s hard-line measures to cut interest rates and flood the system with excessive liquidity levels, now “instability of stability” is the most important risk. “

There is a correlation between the Fed’s balance sheet expansion and the S&P 500 index. Whether the correlation is due to liquidity going to assets through leverage or only to “Psychology” from “Fed Put “ the result is the same.

Next bear market, when will be the next bear market?  3-Things will tell you

Therefore, it is not uncommon for market volatility to increase when the Fed begins “Reduced” their bond purchases. Gray shaded bars are displayed when the balance is flat or contracting.

Next bear market, when will be the next bear market?  3-Things will tell you

It should be noted that the time elapsed since the initial reduction in assets and the correction in the market is almost immediate.

However, the reduction in conicity leads to higher rates.

Rising Fed rate

The risk of a market correction increases even more when the Fed lowers its balance sheet and increases the rate of overnight lending.

Next bear market, when will be the next bear market?  3-Things will tell you

What we now know, after more than a decade of experience, is when the Fed slows or depletes its monetary liquidity, the clock starts ticking in the next corrective cycle.

How discussed above, the Fed should use the $ 120 billion monthly in QE to raise rates and prepare for the next recession. But instead, continue kick the “Politics can” further down the road. The longer they wait, the more difficult it will be to normalize politics without risking significant market volatility and reversing the economic recovery.

Of course, history already shows that it will happen. Once the Fed begins to raise rates, market corrections occur quickly, usually within 2 to 4 quarters. However, recessions and bearish markets take longer and lengthen due to ongoing interventions. The current average time period between the first rise and the onset of a recession is 11 quarters. (Shaded green bars denote rate hike campaigns.)

Next bear market, when will be the next bear market?  3-Things will tell you

It should be noted that there are ZERO times in history where the Fed raises rates that did not end negatively.

Next bear market, when will be the next bear market?  3-Things will tell you

Conclusion

There are currently no signs of recession. Still, the Fed continues to buy $ 120 billion a month in bonds while maintaining the “Psychological Fed” in place.

The Fed also keeps the overnight lending rate at zero, and the yield curve is still not very close to reversing.

However, these items will change quickly, and when they do, the clock will start ticking toward the next recession and the bear market.

As noted in Slowly at first:

“It is essential to understand that change is taking place. But unfortunately, the reason investors get stuck in bearish markets is that when they realize what’s going on it’s too late to do anything about it.

Bullish markets attract investors to believe that “this time is different.” When the overcoming process begins, this slow and arduous issue is met with continued motives for which the “bullish market will continue”. The problem comes when it finally doesn’t come. As noted, “bear markets” are rapid and brutal attacks on “investor capital”.

Pay attention to these indicators. The Fed is discussing volume reduction. The yield curve is flattening and there is a risk that the Fed will raise rates next year. They are all actions that are very reminiscent of previous market processes.

However, the lids are difficult to identify during the process “Change is happening slowly.”



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