Is Dow 13,000 - 15,000 on the horizon at the rate of this plunge?

[cyber888]

I follow some diff financial youtube channels and like this guy as he usually spits out concise videos and is a data analysis guy.

In this short video starting about 1:43 in he talks about 20 times the markets have dropped 10% and the amount of time they have recovered in:
a) next quarter
b) next 2 quarters
c) next year

Youtube: https://youtu.be/EFPWKyMQliQ?t=103

Great video .. guess more pain for 2 quarters

 

[tmm99]

My feeling (I said "feeling") is that the strongest support line was around the 18,000-point mark for a long time in the past, so that's where I predict the bottom to be... At least that's what I'm hoping.

 

[stephenson]

Nah ...economy is strong. Just need suitable federal leadership.

 

[njhowie]

I don’t think we necessarily have a recession although that is certainly possible.

The likelihood is that there is a recession on the (1 to 2 year) horizon.

The stock market is an indicator of perception and leads the economy. Generally, it's 6 to 12 months ahead of it. Remember how when Trump took office, all of a sudden "animal spirits" became a topic, and the market immediately took off...even though companies had not yet come out of the earnings recession.

This fall in the markets will certainly affect investor sentiment. It has already dialed back the net worth of a good swath of folks with funds in the market in a very short period. It's been reported that net outflows from the index funds had already reached all-time highs recently - mom-and-pop are bailing. It's a negative feedback loop, working in reverse just as well as the positive feedback loop did on the way up.

Consumers will likely cut back on discretionary spending during 2019. Some are going to cut back on vacation spending. Others are going to put off buying the new car, or settle for a cheaper used one. These are the types of things which lead in to a recession.

Bottom line, there is a lag from when the stock market takes the big hit until we have confirmation of a recession.

 

[DEC-1982]

As a guess, probably another 10% drop, given that the average bear market drop is 28-30%. On the other hand, I haven't seen a real trade war before, not with an economy the size of China's economy.

 

[MichaelB]

The likelihood is that there is a recession on the (1 to 2 year) horizon.

2 years is a long time, anything can happen. What indicators point to a recession in the next year?

 

[Dawg52]

My feeling (I said "feeling") is that the strongest support line was around the 18,000-point mark for a long time in the past, so that's where I predict the bottom to be... At least that's what I'm hoping.

Similar feel to me. If the dow hits 18k I will probably rebalance at that point. If it tanks to the 13k-15k area I will do so again. No fun watching the dow dive but not surprising. Might as well make a plan.

 

[BeachOrCity]

For people whom the market drop changed their aa for equities below target I think now is a good time to rebalance.

(Note. I am not saying your target changed, just that is your target is say 50-50. This 20% drop may have you at say 45/55)

 

[Lsbcal]

2 years is a long time, anything can happen. What indicators point to a recession in the next year?

None of the ones I record monthly.

 

[audreyh1]

For people whom the market drop changed their aa for equities below target I think now is a good time to rebalance.

(Note. I am not saying your target changed, just that is your target is say 50-50. This 20% drop may have you at say 45/55)

Yes, some folks confuse their portfolio changing allocation with rebalancing which is bringing your allocation back to target by buying and selling the undervalued and overvalued asset classes respectively.

I’m looking more for S&P500 possibly dropping to around 2100, or even 1900-2100. Not that it might not undershoot briefly. That gives up several years of market gains and is a pretty stable level that lasted a couple of years with several corrections and some serious economic concerns/upheavals. Certainly seems like a much more fair value level compared to the past couple of years and would mean we’d been flat for 4 years.

 

[audreyh1]

None of the ones I record monthly.

Me neither. I suppose it’s possible to “talk ourselves into one”. Would business pull back because stock market levels frighten them? Hard to say.

How about your bond asset class swapping? Seems like a poor environment for corporate bonds - they’ve already been under some pressure.

 

[cyber888]

This article is also a good read. What is alarming is the Quantitative tightening which magnifies the rate hikes to about 6.9 instead of 2 for 2019 https://seekingalpha.com/article/4229970-daily-state-markets-meets-eye-happening

 

[Lsbcal]

Me neither. I suppose it’s possible to “talk ourselves into one”. Would business pull back because stock market levels frighten them? Hard to say.

How about your bond asset class swapping? Seems like a poor environment for corporate bonds - they’ve already been under some pressure.

With short to intermediate TIPS looking attractive to me (over 1% real return), I temporarily have shelved the investment grade to Treasury swap strategy. All my movements are in retirement accounts so no tax consequences.

Regarding that swap strategy, the yield curve would have to get flatter to make that Treasury move. It is not a strong function of the yield curve but I'd look for the 10 year - 3 month Treasury slope to drop to about 40 basis points and it was 64 bp last I looked.

 

[street]

So, can someone explain to me why when markets go down your % change. Don't you still have so many shares of equity funds and so many bond funds? The price goes down but don't you still have the same number of shares.

So, if no rebalancing is done, and markets start to rise, then you come back up, then the equity % comes back up to where it was at, right?

I have always just bought and held. I hope this is an embarrassing question for me. LOL

 

[ShokWaveRider]

I very much doubt it. Take the 2009 Low, add 10% - 20%. That will most likely be the low if it ever gets that far.

 

[joeea]

At the rate this is going, I don't see any good news on the horizon. Will we hit rock bottom at 13,000 - 15,000 ?

No.

It might be higher. It might be lower.

 

[Spock]

Here is your market fix and economic forecast all in one:

 

[joeea]

Every recent recession is worst than the previous one

Huh?

Do you have evidence for that statement? Maybe you can post it?

 

[Lsbcal]

Yes, some folks confuse their portfolio changing allocation with rebalancing which is bringing your allocation back to target by buying and selling the undervalued and overvalued asset classes respectively.

I’m looking more for S&P500 possibly dropping to around 2100, or even 1900-2100. Not that it might not undershoot briefly. That gives up several years of market gains and is a pretty stable level that lasted a couple of years with several corrections and some serious economic concerns/upheavals. Certainly seems like a much more fair value level compared to the past couple of years and would mean we’d been flat for 4 years.

I looked at 3 market drops which were not associated with recessions. Here are the results of the time to get back to the previous market high:

1962..... -26% 14 months
1987..... -32% 8 months
1998..... -18% 5 months
current.. -20%

 

[joeea]

This might help:

https://www.marketwatch.com/story/h...milarly-brutal-losses-in-a-quarter-2018-12-24

 

[Spock]

This article is also a good read. What is alarming is the Quantitative tightening which magnifies the rate hikes to about 6.9 instead of 2 for 2019 https://seekingalpha.com/article/4229970-daily-state-markets-meets-eye-happening

But... the Fed supposedly isn't selling anything off its balance sheet as the above article asserts. The Fed is letting bonds and MBS mature and then not buying new ones to replace.
https://www.stlouisfed.org/open-vault/2018/july/how-fed-reducing-balance-sheet


Rhetorical questions: So is simply not re-investing proceeds back into the market, not buying more assets, really the same as tightening? Where do the proceeds go if the Fed doesn't re-invest them? How does the balance sheet actually contract if the fed is receiving funds as mortgages are paid off?

The money to buy those bonds came from a keystroke on a spreadsheet, apparently it disappears the same way.

 

[cyber888]

But... the Fed supposedly isn't selling anything off its balance sheet as the above article asserts. The Fed is letting bonds and MBS mature and then not buying new ones to replace.
https://www.stlouisfed.org/open-vault/2018/july/how-fed-reducing-balance-sheet


Rhetorical questions: So is simply not re-investing proceeds back into the market, not buying more assets, really the same as tightening? Where do the proceeds go if the Fed doesn't re-invest them? How does the balance sheet actually contract if the fed is receiving funds as mortgages are paid off?

The money to buy those bonds came from a keystroke on a spreadsheet, apparently it disappears the same way.

To answer the question .. Yes. It is seen as equivalent to tightening, when they dont buy back assets. Sure old debts mature, but more new debts coming in .. and thats a disaster if the feds dont buy em. The market was not spooked about the rate hike, but the Fed balance sheet on autopilot.

 

[joeea]

The market was not spooked about the rate hike, but the Fed balance sheet on autopilot.

It's always fun to hear folks opine about the reason why the stock market reacted the way it did.

 

[Spock]

To answer the question .. Yes. It is seen as equivalent to tightening, when they dont buy back assets. Sure old debts mature, but more new debts coming in .. and thats a disaster if the feds dont buy em. The market was not spooked about the rate hike, but the Fed balance sheet on autopilot.

It's only a "disaster" because the market has become an addict of the Fed socializing losses. I still don't comprehend how people think the market actually recovered when central banks have been creating money out of thin air to buy trillions of assets as recently as 2014.

Even now, the fed is still buying MBS and and treasuries even as the balance sheet contracts. Anything over 30B in maturing treasuries and 20B in maturing MBS is re-invested back into those markets.

 

[RenoJay]

I sincerely doubt it'll be a straight drop. There are usually big upward bounces during downturns. But for me personally, the range the OP mentions (DOW 13k - 15k) is about the range where I'd start putting my $$$ back into the market, and if it does't get close to there, then I guess I'll be a fixed income investor for a very long time. In most full cycles (not all) the broad indexes dip below the peak from the previous bull. The previous bull market peaked at around Dow 14,000.