Weekend Reading: Why This Isn’t “THE” Bear Market…Yet

After two significant corrections during 2018, this has to be the beginning of a “bear market,” right?

It certainly is possible given the headwinds that are starting to weigh on corporate outlooks such as ongoing trade wars, weaker revenue growth, a strong dollar, and higher interest rates. However, despite these concerns, there are three things which suggest the necessary psychological change for a more meaningful “mean reverting” event has yet to occur.

Interest Rates

During previous market declines, where “fear” was a prevalent factor among investors, money rotated from “risk” to “safety” which pushed Treasury bond prices higher and rates lower. Despite two fairly strong corrections in 2018, bonds have not attracted the “flight to safety” as investors remain complacent about the future prospects of the market.

VIX

A look at the Volatility Index (VIX) confirms the same as the bond market. Despite the two corrections, the VIX never spiked to levels consistent with “fear” that a correction was in process. Currently, the VIX remains below the average level of the index going back to 1995 and during the “October massacre” failed to even rise above the level seen in February of this year.

Gold

Another “fear trade” which has failed to show any fear is that precious yellow metal. Again, despite two major corrections, gold has failed to find buyers in a “safe haven” trade. In fact, despite consistent calls that gold was needed to offset inflation, it has failed to find any support from investors who continue to chase market returns.

Here is the point – the pickup in volatility this year should have dislodged investors out of their “passive investment slumber.” Yet, there is no anecdotal evidence that such has been the case. There are two possible outcomes from this current situation:

1. The majority of investors are correct in assuming the two recent corrections are just that and the bull market will resume its bullish trajectory, or;
2. Investors have misread the corrections this year and have simply not yet lost enough capital to spark the flight to safety rotations.

Historically speaking, the “herd” tends to be right in the middle of the advance at very wrong at the major turning points.

There is mounting evidence that we may indeed be at the beginning of one of those turning points in the market. If that is the case, investors are likely going to find themselves once again on the wrong side of history.

The “real” bear market hasn’t started yet. When it does we will likely see traditional “safe haven” investments telling us so. It will be worth watching gold and rates for clues as to when the masses begin to realize that “this time is indeed different.”

Just something to think about as you catch up on your weekend reading list.

Economy & Fed

• Dem’s Won – Now They Must Deliver by Jonathon Trugman via NY Post
• Washing Machines, Dishwashers More Expensive From Tariffs by Jeffry Bartash via MarketWatch
• The Dog That Isn’t Barking by Joe Calhoun via MyPersonalCFO
• Maxine Waters Set To Take On Wall Street by Stephen Moore via Washington Times
• PG&E Says Equipment Failed Sparking Wildfires by Maria Armental via MarketWatch
• A Surge In Corporate Debt Is A Vulnerability To The Economy by Pedro de Costa via Forbes
• McConnell Calls For Bipartisanship Is Hypocritical by Victor Reklaitis via MarketWatch
• Trump’s Tax Cut Was Supposed To Change Behavior by Jim Tankersley via NYT
• Peak Fiscal IN-Discipline by Scott Sumner via The Money Illusion
• What To Expect From Washington’s “Big 3” by Paul Brandus via MarketWatch
• We Need To Deal With China, Not Tariffs by Thomas L. Friedman
• Japan’s Economy Has A $5 Trillion Problem by Daniel Shane via CNN