Hulbert: my stock market forecasts for June are probably wrong, but watch out for August

I’m not holding my breath, and I’m sure you won’t either.

Can we learn from this experience? Remember, again, that the financial markets are never 100% predictable. Randomness (luck, in other words) plays a huge role in short-term market reversals, no matter how strong an analysis is. Overconfidence is a vice.

This episode reminds me of a famous saying of Josh Billings, a 19th century humorist.: “The problem with most people is not their ignorance. It is knowing so much that it is not.

In my defense, I declare myself “nolo contendere”.

Another lesson is that it is never true that all the data points to the same precise conclusion. For example, in this column from the beginning of April in which I suggested that the final bear market downside could be June 14, based on the VIX, I presented another historical parallel that points to a final low on the 7th August, based on the number of days between the end of the first abrupt fall in the bear market and its final end.

This other analysis was just as plausible and just as robust based on historical data. The jury is still out of this forecast.

However, the investment implication is that we need to focus on the weight of the evidence rather than a single indicator, no matter how strong it is.

Some of you have suggested that I take another lesson: the reason the market hit bottom so soon after the VIX spike was due to the extraordinary stimulus from the US government that was adopted in mid-March . I am not sure that this is the right lesson.

Consider each of the bear markets since 1990 on the schedule maintained by Ned Davis Research. As you can see in the attached table, the wait time for the VIX peak before the lows in these bear markets varied from 0 days (in the case of the 1998 bear market which coincided with the collapse of the long-term capital management) to 171 days (in the case of the 2015-2016 bear market).

In any event, I find no correlation between the length of this delay and the speed and depth of the federal government’s response.

• In the 1998 bear market, no public money was used to save long-term capital management (LTCM). At best, there was an implied guarantee from the federal government, but that only materialized several weeks after the peak of the VIX and the end of the bear market. It was then that the Federal Reserve Bank of New York organized an LTCM bailout plan in which the hedge fund’s largest creditors extended $ 3.6 billion in credit. So even if you consider this as an example of the federal government halting a bear market on its way, that cannot explain why the bear market and the VIX peaked on the same day (August 31).
• Next, consider the bear market that occurred following the September 11 terrorist attacks, when the VIX peaked (September 20) a day before the market reached its lowest level (September 21). The government promised some stimulus on this occasion, but by today’s standards, it was tiny: $ 15 billion, up from almost $ 5 trillion today (if the stimulus package approved by Congress and the expansion from the balance of the Federal Reserve).
• Arguably the closest analogy to the current situation is the Great Financial Crisis (GFC) of 2008-2009, as it is the only other bear market in which the total amount of government stimulus is close to what was adopted. in the current pandemic. But in this bear market, the VIX peaked 109 days before the bear market hit its lowest level.
• Some of you have argued that the GFC is not analogous because the worst of this bear market occurred during the transition from the administration of President George W. Bush to that of President Barack Obama, creating a additional level of uncertainty. I’m not buying this argument; there was no question that the government, under either president, was prepared to inject large sums of money into the economy. The Federal Reserve BalanceFor example, that is a measure of the liquidity that was flooding the economy, which has more than doubled since September 2008 (when Lehman Brothers collapsed) until the end of this year, going from $ 925 billion to more $ 2.2 trillion. It was before President-elect Obama took office. Yet the bear market did not stop until March 2009.

At the end of the line? The lessons of history are never easy or direct. My best guess is that the US stock prices. United States They will fall in the coming months, but the lows of March 23 will remain. I gave a reason for this wait in a column earlier this month. But I’m ready to be wrong again.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert notes follow investment bulletins that pay fixed costs to be audited. He can be contacted at [email protected]

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