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Following last weeks sell off – which was the most serious 3-day Dow plunge in almost 3-years - investors are asking whether or not greater losses, or even a market crash, lie ahead. While I am definitely in the camp that believes US stocks are overvalued and the US economic expansion was built on shaky ground, I don’t necessarily think that a crash is imminent. Rather, and despite all of the gloom, a single Bloomberg headline suggests that a crash is unlikely:
‘Dollar Advances as Investors Shun Global Stocks, Seek Safety of U.S. Debt’
Bloomberg. April 18, 2005
That the words ‘safety’ and ‘U.S. debt’ can be used in the same sentence without the intent of being a punch-line leads me to believe the financial world is not thinking crash. Rather, financial market momentum and liquidity still rule the day over true ‘safety’ (which is gold, not U.S. debt).
As for last weeks dump, while it could definitely be enough to negatively impact investor psychology and make it difficult for the markets to gain any serious traction during the next bounce, in some respects the decline was not all that serious.
A Real Dow Dump
The Dow plunged by triple digits in each of the three days ended April 14, 2000. However, instead of losing 420 points like last weeks 3-day dump, the Dow declined by 981 points (April 12-14, 2000). Thanks to the benefit of hindsight, we know that the April 2000 sell off was an important date (the statistics suggest that April 14 marked the end of the margin debt craze and/or unofficial beginning to the great bear market).
Bears Crawl Out of Hibernation
The threat of protectionism continues to escalate, the economic statistics are arriving below expectations, negative news from specific companies (GM, AIG, IBM, etc.) is spawning broader market concerns, and from a technical standpoint (basic moving averages) last week’s sell off was tremendously ugly. These items of interest - along with the uncertain interest rate/commodities/geopolitical outlook – are enough to suggest that the US financial markets will encounter serious headwinds for some time.
That said, it is worth remembering that in the 6-sessions following the April 2000 Dow debacle (-981) the Dow managed to gain back 819 points. Point being, as important as the April 2000 sell off was in hindsight, it was really just the beginning of a long stock market grind lower: US stocks declined in 2000, in 2001, and again in 2002.
The financial world as we know it didn’t end during the 2000-2002 down years. In fact, in what is regarded as one of the greatest bear markets of all time, no actual ‘crash’ occurred -- just a slow grind lower…
So long as anyone can say with a straight face that ‘US debt’ is a ‘safe’ place to be no crash is about to occur, and no stock market decline is really all that serious. Now bring on the bear.
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