“In the middle of the journey of our life, I came to myself, in a dark wood, where the direct way was lost. It is a hard thing to speak of, how wild, harsh and impenetrable that wood was, so that thinking of it recreates the fear. It is scarcely less bitter than death: but, in order to tell of the good that I found there, I must tell of the other things I saw there.
Through me you go into a city of weeping; through me you go into eternal pain; through me you go amongst the lost people…
Abandon all hope you who enter here.”
-Dante Algieri The Inferno Canto I & III
I’ve often found that classic works of literature can be good metaphors for the market. I think Dante’s Divine Comedy is a fair analog for the process behind a bear market, understanding what got us here, and when the time is right, how we get to paradise. And just like Dante’s journey, the market needs to see all the horrors before we can venture out of the underworld. So, pay Charon (The Ferryman) his silver bit, allow iBC to be your Virgil (Dante’s Guide), and let’s head into the inferno.
Bear markets, like bull markets, all follow a process even if the details driving them change. Deflation and currency battles are the economic causes. The fruits of this poisonous tree are easy to find and you heard of them since Nov/Dec, oil, negative rates, stronger dollar, and the rest. I also find it curious that not only did CEO’s not do the usual long term capital investments for their companies coming out of the last recession but many seem be battening down the hatches as we speak.
On the political end of things there are massive headwinds. We have ISIS, Turkey, Russia, Iran; seriously who’s not in this category? And we have an election year in the States, which wouldn’t be too worrisome if you didn’t look under the hood at who’s running. I’m going to side step the debate since politics has more to do with emotions than with logic. Instead I’ll put my Poli Sci degree to work for you and tell you Trump will likely be the republican candidate with Rubio falling short, if he wins New Hampshire and regains his traction. On the other side we really have to wait for South Carolina, if Sanders wins there with strong African American turnout, Larry David will have work for at least the next 4 years. The only way to temper those political fears is to realize nothing will make it through Congress.
The last part of this is psychological impacts of a falling market. As of right now, Main Street investors do not realize what’s in front of them other than cheap gas. Hallmark consumer names have held up fairly well so far, but what do you think happens when the nightly news starts talking about a possible recession. Again, everything has a process, sell oil & gas, followed by associated sectors, then high beta/risk, and so on. Everyday folks will have nightmares of 2008, then look at their 401k, and confidence will contract. Even on the professional side, look at a 50 year chart and tell me with a straight face you would be comfortable committing fresh capital to the market here and now.
Now that we know where we stand let’s descend further into the pit and look at what should happen next before we truly bottom:
- Earnings misses (we’re seeing this now)
- Guidance comes down
- Saudis have to cut production
- The Fed needs to send a clear message, even if it is more lunatic hikes
- Analysts need to reduce their estimates and downgrade
- Banks are going to have to do some write-downs
- Like any crime scene, we need dead bodies, couple oil, regional bank or two, and a bunch hedge funds
- We need more volatility. The only thing that kills volatility is more volatility. Weird but true.
Please feel free to post any additions you have in the comments section.
All of the above primes the market to move higher afterwards and will likely give us a chance to enter quality stocks at an unreasonably low valuation. To end this on a positive note (cause I’m a positive kinda guy) Dante makes it into heaven (spoiler alert) and as such the market will not trade to zero. If you can resist temptation for a while, you will survive. Just try to relax and tune out the noise.
-Chris
PS- If you haven’t read the Divine Comedy get the cliff notes. It’s easily one of the most important and hardest reads I’ve gone through and I had a Vatican top dog walking me through it.
Past performance is not a guarantee of future results. Price, yield and all security markets are subject to daily change in valuations. Any information provided is for informational purposes only and does not constitute a specific recommendation. Opinions offered are general in nature and are intended to provide industry information, strategy and investor education.
Austin Wintory – Apotheosis (LIVE)
If you enjoy the content at iBankCoin, please follow us on Twitter
Chris, from you 1-8 list, it looks like 1, 2, and 5 are occurring. I would say 7 would proceed 6, sooner or later. As the meme has been, Oil (3) and Fed (4) are the unknowns. You may be able to get that huge volatility spike (8) if the Fed gave their clear lunatic direction to raise rates. Of course, this is all pure conjecture, but I see this as a path to get to your points. Appreciate the post!