June 27, 2008
Not gentle like before

On the bear market

The first time the S&P 500 entered bear market territory in January the Fed surprised everyone and cut interest rates by 75 bps.  The second time, in early March, the Fed offered a new ‘Term Securities Lending Facility’. Finally, the last time the S&P 500 was in bear market territory – leading up to and after the Bear Stearns’ debacle – the Fed expanded its lending programs, joined with JP Morgan to bailout Bear, cut its discount rate on a Sunday, and announced a new special lending facility designed to lend money to a longer list of firms than ever before. 

Yes, it is a stretch to conclude that the Fed conducts monetary policy by watching the stock markets. However, is it mere coincidence that the Fed was actively trying to boost investor confidence nine out the 10-times the S&P 500 has been down by 18% from its October 11 high. 


Jan 21-22: Fed holds unscheduled meeting and lowers its target for the federal funds rate 75 basis points to 3-1/2 percent.  Press Release
Mar 7: Fed ‘announced two initiatives to address heightened liquidity pressures in term funding markets.’  PR
Mar 11: Joins other central banks in an attempt to address liquidity pressures.  PR
Mar 14: Helps JPM bailout Bear Stearns.  PR - JPM
Mar 16: Fed meets and announces policy actions on a Sunday.  PR
Mar 18: Fed cuts federal funds rate 75 basis points to 2-1/4 percent.  PR

For the record, the S&P 500 has not entered a bear market on a closing basis and has only hit the -20% mark once since the current downturn began. This may soon be about to change…

On the recession

The average peak to trough length of the 31-recessionary cycles since 1854 is 17 months. The last two U.S. recessions, in 1991 and 2001, each lasted all of 8-months.  To put these numbers in perspective, it has been 212 months – or almost 18-years – since the U.S. has been in what would qualify as your ‘average’ recession. With this in mind, why with U.S. home prices crashing and energy prices skyrocketing do some analysts believe that today’s recession (which may or may not be all of 6-months old) will soon end?

Stay on the run

For the first time in nearly 18-years the U.S. is probably in, at the minimum, your average recession. If history holds, the U.S. consumer will save a few more dollars during the recession, more jobs will be lost, and, perhaps most importantly, U.S. stocks will sustain bear market losses.  In other words, if you thought the last 10-months were scary, you may want to close your eyes…

Incidentally, the one time the Fed did not act when the S&P 500 came within 2% of hitting an intraday bear market was yesterday.