This Bear Market Rally is still not complete but should be shortly and Here’s When The Bear Market Rally Ends.
We are actually still in a bear market rally with today clearly being another ‘green’ day, it is likely the rally will continue until the herd jumps in again.
It is not uncommon what-so-ever to re-touch near a 50% level during voracious bear markets, however, at this point you can actually argue the market is more over-valued now given the environment than when the Standard & Poor’s was near 3400 ironically enough.
The markets are already trying to price in a possible slowdown in the COVID-19 pandemic. But, even if the Pandemic miraculously disappeared today, the massive economic shock won’t disappear anytime soon.
Major indices all over the world have already plummeted into Bear Territories and the recent rally is simply a correction. In fact, if you look at previous bear markets, you will find plenty of temporary Bullish rallies within the larger Bearish move.
- Falling Output. Less will be produced leading to lower real GDP and lower average incomes. Wages tend to rise much more slowly or not at all.
- Unemployment. The biggest problem of a recession is a rise in cyclical unemployment. Because firms produce less, they demand fewer workers leading to a rise in unemployment.
- Higher Government Borrowing. In a recession, government finances tend to deteriorate. People pay fewer taxes because of higher unemployment and they need to spend more on unemployment benefits. This deterioration in government finances can cause markets to be worried about levels of government borrowing leading to higher interest rate costs. This rise in bond yields may put pressure on governments to reduce budget deficits through spending cuts and tax rises. This can make the recession worse and more difficult to get out of. This was particularly a problem for many Eurozone economies in the aftermath of 2009 recession.
- Hysteresis. This is the argument that a rise in temporary (cyclical) unemployment can translate into higher structural (long-term) unemployment. hysteresis
- Falling asset prices. In a recession, there is less demand for buying fixed assets such as housing. Falling house prices can aggravate the fall in consumer spending and also increase bank losses. This fall in asset prices is particularly a feature of a balance sheet recession (e.g. 2009-10) recession.
- Falling share prices. Lower profits lead to lower levels of share prices.
- Social problems related to rising unemployment, e.g. higher rates of social exclusion.
- Increased inequality. A recession tends to aggravate income inequality and relative poverty. In particular, unemployment (relying on unemployment benefits) is one of the largest causes of relative poverty.
- Rise in Protectionism. In response to a global downturn, countries are often encouraged to respond with protectionist measures (e.g. raising import duties). This leads to retaliation and a general decline in trade which has adverse effects.
These factors are not at the top of the news yet cycle right now. But I assure you that when the Corona-Virus takes a back seat to the Presidential Election, the reality will set in and we will witness a new test of the bottom.
So, such rallies as the one we are seeing now will be sold aggressively and markets will plummet into fresh lows. Until a 50%-55% drop has happened, we can’t start thinking about bottom formation.
Conservative investors should continue to follow the Wealth Preserver signals as is proven historically, the signals will protect you from every market crash that matters.