Ten years ago the world ended. Only it didn’t.
On Monday, September 15, 2008, Lehman Brothers, founded in 1844, shocked the world by filing for Chapter 11 bankruptcy protection.
Over a frantic weekend of negotiations, the U.S. Treasury and Federal Reserve had failed to come up with either a rescue package or a buyer, so the fourth largest firm on Wall Street, with 25,000 employees, simply disappeared.
In the following weeks, the Fed and Treasury reversed course and bailed out insurer AIG and mortgage giants Fannie Mae and Freddie Mac, with help from a panicked Congress, which authorized $700 billion to purchase toxic mortgages securities from financial institutions under the Troubled Asset Relief Program (TARP).
To say those were scary days is a huge understatement. During the 1987 stock market crash, we worried it would be a repeat of 1929. Turned out the 1987 crash was the only bear market not followed by a recession since World War II. But 2008 was the real deal—a stock market crash, financial crisis, and a recession that was the biggest since the Great Depression.
What did investors learn from this near-death experience—or what should they have learned?
Thank God I’m an American!
That may sound jingoistic to some and overly pious to others, but in the real world of dollars and cents, well, it’s true.
While investors who were foolish enough to throw their money into emerging markets now race for the exits, amid 60% interest rates in Argentina, 18% inflation in Turkey, recession in South Africa, and a currency crisis spreading to Indonesia, even India, the U.S. economy is humming along.
In August, employers added 201,000 new jobs, slightly above the consensus forecast; the unemployment rate stayed at 3.9%, and average hourly earnings rose by 2.9% year over year.
That last stat got the most attention, because wage growth has long been the missing piece of this economic puzzle. As unemployment has plunged, wages haven’t followed. But if wage growth persists—a big “if”—that would be great news for the millions of Americans whose income has fallen behind.
Yet there’s a downside as well.
Finally, finally, finally the S&P 500 index closed at a new all-time record Friday.
Several times the large cap benchmark U.S. index tried to surpass its previous all-time closing high of 2872.87 of January 26th and several times it failed. But Friday’s close of 2874.69 did the trick.
In fact, it took seven months, or 145 trading days, for the S&P to recapture its previous high, nearly three times the length of the average correction. For all the fear and handwringing that produced on Wall Street and in the media, its biggest decline was a “whopping” 10.2%, just about the bare minimum you can have and still call a correction.
This week also marked the date on which this bull market became the longest of the past hundred years. But it needed to hit a new high for that mark to stand, too. Otherwise, market historians would have recorded the end of this bull on January 26th, because bull markets are measured from trough to peak.
OK, so now that that bit of record keeping is out of the way, what next? What does this bull market need to continue and even go higher?
While the Nasdaq Composite index rallied to hit record highs and the S&P 500 index came within 1% of its all-time peak, the Dow Jones Industrial Average never got within 1,000 points of its January 26th all-time closing high of 26,616.71. Until Friday.
That was when it closed at 25,687.38, its highest since February 1st. It followed a rollicking two-day, 500-plus point gain for the granddaddy of all U.S. stock market indexes. The S&P 500 also has mounted solid gains that put it within 22 points of its February all-time high.
Wall Street gurus attributed the gains to reports that the U.S. and China were restarting trade talks after both countries slapped tariffs on tens of billions of dollars of exports. The Wall Street Journal reported both sides want to reach a deal by November, just in time for—surprise, surprise—the U.S. midterm elections,
Technicians have been watching the S&P closely as it has twice tried and failed to break through that previous high. It would need to do that for this bull market, which on Wednesday will be, by some measures, the longest in the past hundred years, to continue.
So, how does the Dow fit in to that picture?
From early April, the S&P 500 index rose 10% from a low of around 2581 to 2,846 on July 25th. That was within 26 points—less than 1%–of its late January all-time high of 2,872.87.
Since then, it slipped a bit to just above 2800, but then retraced its steps to close at 2827 Thursday.
The Dow Jones Industrial Average followed a similar trajectory, while the Nasdaq Composite and small-cap Russell 2000 indexes, which had healthy rallies of 22.6% and 14.3%, respectively, from their February lows, made new all-time highs in July. They, too, have slid in the weeks since and are beginning to inch up again.
The escalating trade war between the U.S. and China—and it’s no longer a question of “whether” we’re in a trade war; it’s how serious it’s going to be—has had an impact, particularly on the Dow, which includes giant exporters like Boeing and Caterpillar.
But 30% of the S&P 500’s revenues comes from overseas, and the big tech companies on the Nasdaq have huge international sales, too. Even the mostly domestic Russell, lately a haven for trade war-wary investors, would be hurt by the higher inflation punitive tariffs would unleash.
The big question now is, can the market get to new highs, and why does that matter?
For Facebook, the fake news, privacy violations, and stolen data came home to roost Wednesday night.
In a conference call after the market closed, the company said it expected revenue growth—Facebook’s be-all and end-all—to actually decrease in the second half of the year.
And not by a little. Chief Financial Officer David Wehner told analysts revenue growth would decelerate “by high-single-digit percentages from prior quarters” in the third and fourth quarters.
That doesn’t mean revenue is going to decline, just that its growth will fall by 7-9% each quarter, a substantial drop. The number of U.S. Facebook users has remained steady, a sign of maturity here.
Starting Wednesday evening, Wall Street went nuts. By Thursday’s close, the stock had fallen almost 19%, erasing $120 billion in market capitalization, the biggest one-day decline for a single stock ever.
The Nasdaq Composite lost 1% on the day and the S&P 500 fell by 0.3%, but the Dow Jones Industrial Average, which doesn’t include Facebook or the other FAANG stocks (Apple, Amazon, Netflix, or Google’s parent Alphabet), actually posted its third straight gain, closing at its highest level since late February.
On Friday morning the Nasdaq fell again, thanks to Twitter’s 16% share price slide.
So, what does Facebook’s fall mean to the other FAANGs and the market as a whole?
If stock prices continue to rise, as they have for the last couple of weeks, then some time within the next month or so this bull market will become the longest since World War II.
That’s right: This most unloved of all bulls may last longer than the 1990s stock bubble, which went from irrational exuberance to dotcom euphoria before crashing back down to earth.
Before Thursday’s modest sell-off, the S&P 500 index was less than 60 points below its all-time closing high of 2872.87, set January 26th. The Dow Jones Industrial Average was a more sizable 1,400 points from its late January peak. The Nasdaq Composite index actually hit its all-time high on Tuesday. All three major indices have bounced back nicely from their double-bottom lows in early February and early April.
We at GoldenEgg Investing® always thought the late January-early February sell-off was a correction, not the beginning of a new bear. The fundamentals—economic growth and earnings—are just too good to be derailed by anything less than a recession, full-blown trade war or actual war, all of which are possible, but not likely just yet.
But if the market manages to top its late January all-time high and keeps moving higher, it will face a couple of big barriers to further advancement.
It’s Friday the 13th. If you’re suspicious (or excessively careful), you should avoid black cats, spiders, cracks in the sidewalk, or lakes where a camper named Jason drowned years ago.
But one thing you shouldn’t avoid—at least for now—is stocks, because at least over the last couple of weeks they’ve mounted a stealthy but solid rally.
The Standard & Poor’s 500 index is up more than 100 points since the end of June, and it’s now only 2.5% below its all-time high set January 26th. The Dow Jones Industrial Average has picked up nearly 900 points over the past 12 trading days, and is 6% off its all-time high.
This has happened despite a heating up of the trade war which Treasury Secretary Steven Mnuchin said is not a trade war, but only “trade disputes” with China. (More on him later.) Meanwhile, yields on ten-year Treasuries have settled comfortably below 3% (they yielded 2.84% around midday Friday) and the U.S. dollar index has climbed from below 89 in February to almost 95 Friday.
So, what’s behind it?