Investment Strategies: From Wall Street to Main Street Hingham MA

By Craig Hartnett of Hingham MA

Heading into 2019, the stock market is in a bear market. This is an overview of the length of time, amount of decline and the time it took to recover fully for the U.S. bear markets going back over 70 years:

For all these bear markets excluding 2018, the average decline is 30.4% with it being 13 months from the peak to the market bottom. It took on average 22 months to fully recover the losses.

I currently expect this bear market will be more moderate with the maximum decline between 20% and 30%.

The bear markets that had a total decline from 20% to 30% lasted on average 10 months from the start of the decline to the market bottom. These bear markets also took much less time to recover the losses at also 10 months on average.

The most recent mild bear market in 1990 took the least amount of time to recover at 4 months. The reason for this is that after raising interest rates from 5.75% to 9.75% preceding the 1990 bear market and recession, the Federal Reserve began lowering rates 14 months before the official recession began which caused the bear market decline to be more shallow and much shorter.
In contrast, the two bear markets that began in March 2002 and October 2007, the Federal Reserve did not begin lowering interest rates until the official recession began and the bear market declines were much more substantial at 49% and 57%.

Therefore a critical factor that leads to a more moderate bear market and not a severe bear market is how soon before the actual recession (or sharp slowdown) the Federal Reserve begins to re-stimulate the economy with lower interest rates.

With the current 10 year economic expansion leading the unemployment rate to be lower currently than the level that preceded the last 5 Federal Reserve induced recessions (and bear markets), the Federal Reserve is going to continue to tighten interest policy to cause an economic slowdown or recession except if the markets are in distress and declining sharply.

That creates two likely scenarios. The first is that if the stock market resumes declining sharply, the Federal Reserve may not raise rates further but under this outcome there are more stock market declines to come in 2019. The second likely scenario is if the stock market does stabilize or continue it’s recovery in early 2019, then the Federal will continue to raise rates and do quantitative tightening which will ultimately cause further economic weakness and stock market declines.

Under both these likely scenarios, a decline that lasts only 3 months and a rapid recovery of the 20% market loss that occurred in the 4th quarter of 2018 will not occur.
The bond market is currently pricing in no Federal Reserve interest rate increases in 2019.
A highly unlikely scenario is where the Federal Reserve does not do any further interest rate increases while the stock market continues to recover in 2019. This remote scenario would lead a rapid full recovery of the losses that occurred over the last 3 months. I DO NOT BELIEVE THIS WILL OCCUR.

I believe the bond market is currently mispricing the future interest rate increases that the Federal Reserve will do during 2019.

I BELIEVE THE RISE IN THE STOCK MARKET AT THE END OF DECEMBER IS A BEAR MARKET RALLY SUCH THAT THE VOLATILITY WILL INCREASE AND BEAR MARKET WILL CONTINUE INTO THE FIRST PART OF 2019.

This is meant to provide perspectives on the stock market outlook and is not a recommendation from Craig Hartnett to investors in Hingham MA and the local community.