They say that there are no atheists in fox holes. Recently it has also become clear there are no monetary hawks in bear markets.
For much of the last decade many conservative market analysts have decried our reliance on monetary stimulus to prop up the economy and the stock market. But in the final months of 2018, in the face of the worst stock market declines in a decade, many of these supposedly pragmatic figures quickly abandoned their convictions. As the markets briefly crossed into bear territory, monetary hawks joined with the doves and President Trump in issuing a full-throated call for the Fed to cancel their planned rate hikes and balance sheet reductions. It appears as if the Fed got the message. Almost overnight, the tone from the Fed softened considerably, causing Wall Street to sound the “all clear.”
During the Obama years, many of these erstwhile hawks appeared to partially share my belief that big deficits were a big problem and that an economy built on a foundation of zero percent interest rates, quantitative easing and deficit spending was not a real economy at all. Donald Trump picked up that message in the 2016 campaign and it rang true to many Americans who were justifiably resentful that the bubbles created by these policies primarily benefited the rich. But now that there is a Republican in the White House (and a whiff of fear on Wall Street), those concerns have vanished faster than a cool summer breeze in Texas.
But let’s be clear, there was nothing normal about the nearly decade long, record-breaking bull run in the S&P 500 that came to a spectacular end this Christmas Eve. (During the run, the S&P more than quadrupled from February 2009, and never retrenched more than the 20%). There was also nothing normal in its spectacular ending. The worst December since 1931 during the Great Depression was capped by the biggest Christmas Eve massacre, delaying the “Santa Claus Rally” until the Fed Grinch had a change of heart.
As it turns out, all the markets wanted for Christmas was a dovish Fed. And when Jerome Powell finally started singing the right tune, the December massacre quickly gave way to a great opening to 2019 in the equity markets. The surge has caused many to think that the worst is behind us. But such a conclusion ignores both the size of the bubble that has formed over the past decade and what real bear markets actually look like.
According to CNBC, on average, the bear markets since World War II have lasted 13 months, with stocks losing an average of 30.4 percent of their value in each episode. (KRooney, CNBC, 12/24/18) With the notable exception of the Black Monday Crash in 1987 (which took just one day to cross into bear territory), these downturns developed over many months, and continued after the 20% threshold was crossed. The two most recent bear markets of this century (not counting the current bear) provide stark illustrations of these tendencies.