by Jim Rickards, Daily Reckoning:
The Aug. 5 mini-crash was a potent reminder to investors that stock markets aren’t a one-way street.
It wasn’t the end of the world. Market indexes down 3.0% in a day is a big deal, but it bears no comparison to October 1929 when the stock market fell 21% over two days or October 1987 when the stock market fell 21% in one day.
What caused the Aug. 5 mini-crash? There are several suspects. The employment report issued on Friday, Aug. 2 showed a decline in job creation and an uptick in the unemployment rate.
TRUTH LIVES on at https://sgtreport.tv/
Neither move was extreme but it got the markets’ attention. In fact, the Aug. 5 decline actually started on Aug. 2, giving the two-day decline a greater impact.
It’s also the case that late July and early August was when many companies, especially Big Tech, reported their earnings for the quarter ending June 30, and offered their forward guidance.
Hey, AI: Show Me
Many of these reports showed huge expenditures for artificial intelligence (AI) with little or no gains in revenue. That was enough to cause market analysts and investors to reprice the entire sector.
This “show me” attitude toward AI drove many huge stocks such as Nvidia and Samsung lower even before the two-day rout on Aug. 2 and 5.
Finally, there’s ample evidence that the economy is now in a recession. There’s something much bigger than the markets behind all of this. It’s the economy. I’ve been warning about a recession for a long time — now it’s here.
Last Friday’s unemployment report was a sign. Still, unemployment is a lagging indicator. It means the recession probably began in June or even May. We won’t know for a few more months when the National Bureau of Economic Research makes its unofficial “official” call.
This recession could be severe based on excess inventories (that need to be dumped) and a host of other technical indicators. A protracted recession is consistent with my forecast for a long, slow grind down in stocks as discussed below.
What Comes Next
Just to be clear, Aug. 5 was not the “big one.” A crash of 25% or more in a compressed period of a few weeks (similar to what we saw in March–April 2020) is always possible, but this correction has a dynamic that suggests it’ll feel for a bottom and then settle down.
The “buy the dip” crowd are still around and they’ll be dipping their toes in the water on a continual basis. That doesn’t mean a sudden rally, but it could mean the market will bounce around the new bottom with those needing cash (or just cautious) getting out and the bottom-feeders getting in.
The timing of crashes is hard to predict, even when you know they’re coming. But the aftermath of a crash is even harder to predict. The real impact of the Aug. 5 mini-crash was the increase in volatility.
In place of steady gains, investors should now expect big up and down days within a larger downward trend.
Worse Than a Crash
We may actually be in for something worse than a crash. We may be in for a long, slow grind to a new bottom that could be down 70% or more from the top (to, say, Dow 12,000).
Investors are familiar with the Dow crash of 21% in 1929 but fewer know that the bottom did not come until June 1932, down over 80% from the 1929 high.
Something similar happened in the 1970s where the Dow was 1,000 in 1969 and 1,000 in 1982. It went nowhere in 13 years (with volatility along the way).
Adjusted for inflation, the 1982 index was worth less than half the 1969 index so in real terms you lost over 50% of your wealth during those 13 years before a new bull market began.
The problem with a 25-year recovery (1929–1954) or a 13-year recovery (1969–1982) is that many people don’t have the time to recover. Be prepared for that sort of outcome.
A Cut Is Coming
Here’s what I recently wrote about the prospect of a Federal Reserve rate cut in September: “The best way out for the Fed is to keep their heads down and do nothing. That’s what I expect the Fed to do absent an extreme market meltdown or a sharp spike in unemployment.”
Read More @ DailyReckoning.com
