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Why The Market Tanked, Where It’s Going And How You Can Thrive

To invest in the future, you have to understand what just happened

Perhaps I am the only professional investor who will tell you this: the Coronavirus is not the cause of the recent market plunge. While the human threat, the day-to-day tragedy and the historic uncertainty that it has caused are undeniable, I want you to think about something. The reason the market fell so far, and could well fall much further, is because it was on thin ice to begin with.

In other words, if unemployment had been 7% instead of 3.5%, if the stock market had been 10% from its 5-year low instead of at its all-time high, and if global central banks had kept interest rates above zilch the past several years, the past month would have been different. Would the S&P 500 have fallen hard? Probably. But would it have resembled this rampant de-risking of investors’ portfolios? I doubt it.

KEY MARKET STRESS POINTS (circa February, 2020)

I maintain a running list of what I consider to be the 10 biggest investor worries, ranked in order of significance. As of early February of this year, here is what it looked like. I added brief updated comments (italicized) below each one.

Sentiment

Still too complacent, selloff will be a shocker, as in past bear markets. Cycle of investor speculation and excess could soon be snuffed out.

THIS was the biggest “bubble” Coronavirus popped

Global Economic Growth

Many leading indicators showing persistent weakness

Sure, now they are crashing. But it doesn’t mean they were not way overdue.

Geopolitical

Coronavirus, U.S. Election, Oil War, North Korea

Remember when North Korea was our big issue? The global health crisis has made the rest of those items seem relatively meaningless for the time being.

Corporate bond tipping point

Many corporate bonds have borderline “junk” ratings

This is the part of the new bear market that has only begun to growl

U.S. Treasury Bond Bubble?

60/40 plans are sitting ducks, as bonds yield less than advisory fees

Finally, after years of my barking about this, it is moving front-and-center

Credit

Consumers, government and many corporations all over-leveraged

Bailouts will push out the inevitable. There’s a ton of money owed, and it will not soon be resolved.

S&P 500 index Mania

Passive investing has become too popular, convinced people its easy

Nailed it. Now, will investors “double-down” on that sentiment, and risk getting clobbered by a second, potentially more spirit-busting decline? That’s the story of most bear markets, ultimately. Panic is NOT the final stage. Despondency is.

Valuation

Corporate earnings stagnant, prices elevated. Something has to give.

Something gave, but not in the usual way. Not only are earnings going to be knocked down for a while, many dividend payments could be suspended. That is way beyond even the impact of the Global Financial Crisis on corporations.

Inflation

Governments could inflate to facilitate massive debt re-payments

In an uncanny and unfortunate turn of events, that inflation will end up resulting from the record U.S. Government stimulus just announced, to tide consumers and businesses over until we can freely move about again.

Fed rate decisions

Central banks may be powerless at this point

Apparently, they are powerful in their ability to backstop jittery markets with liquidity issues. However, recent Fed moves have only been another sugar-high for the stock market.

The way forward

So, while you are devising your strategy to get through this bear market and eventually, into the next bull market (whenever that arrives), remember this list. Taken together, these points remind us that things are never as good as they seem, and sometimes it takes a crisis “out of left field” to correct massive overvaluation, leverage, fiscal irresponsibility, etc.

The good news: the bottom will be in many ways a mirror image of the recent top in the stock market and economies of the globe. That is, it will seem dire, unending and entirely uncomfortable. And that will tell you that the transition back to more fruitful, traditional investing ways is upon us. In the meantime, think differently, buckle down, and stay safe, both in your health and wealth.