In Focus: Get Ready For The Fall
Updated: Jul 13, 2020
New York City, November 17, 2006, the Dow Jones Industrial Averages closes at 12,342.56. For the fourth session in a row the Dow has registered a new high. Also, the S&P 500 closes above 1,400 for the first time in six years. The troubles of the dot-com bubble and 9/11 appear to be far in the past.
Around the same time home sale prices increased by over 7% from where the average price stood a year earlier. With non-stop good news flowing, investors celebrate by feeding the markets with fresh capital. In the midst of the excitement and new found riches created by the stock market and real estate market, the U.S. Department of Commerce reports that new home permits dropped 28% from where they were in 2005, the market pays the report no mind.
From the release of the Department of Commerce's grim report, the S&P 500 would continue to trade up for the next 11 months, trading to over 1,500. At the time global investors remained extremely bullish on the U.S. housing market.
The S&P 500 reaching the 1,520 level in 2007 was very significant at the time. The index hadn't traded to the 1,500 level since September 2000, right before the dotcom fallout.
But the rise above 1,500 would be a short stay. Technically, the S&P 500 double topped and failed to break through its levels of resistance. Fundamentally, the housing and credit markets collapsed sending the world into the Great Recession.
Today, markets continue to push up, eyeing the all-time highs from early February 2020. The NASDAQ (IXIC) has already surpassed it's February 2020 high by 9%. The tech heavy index has been fueled by the rise and appeal of the stay-at-home stocks like Netflix (NFLX), Zoom (ZM), and Amazon (AMZN).
The markets continue to rise as the confirmed cases of coronavirus infections rise. The reemergence of COVID-19 has caused major cities in the United States to rethink or roll back their city re-openings. Add to that the very intense debate over the reopening of schools, and it's clear the fundamentals aren't as solid as investors think they are.
In the past, market technicals have coincided with economic fundamentals to move markets, and we will likely see it play out again over the next several months.
Short sellers - myself included - expected the markets to retest the lows from March 23 or the lows from April 2 or the lows from May 13, and instead the markets kept powering upward.
The S&P 500 and Dow appear to be headed back to their highs, but the big question is what will they do once they get there?
Optimistic investors today may be missing the signals, as investors did in November 2006 with the U.S. Department of Commerce report on the drastic drop in new home permits. The second wave of coronavirus cases in 2020 is the drop in new home permits in 2006.
But misplaced optimism by current investors could lead to the S&P 500 and the Dow Jones following the NASDAQ and trading to their 2020 highs.
The deteriorating fundamentals caused by the increasing coronavirus numbers could be the match that sparks a selloff at the top of the markets. If FOMO (Fear Of Missing Out) is what drove the markets higher in late March, April, and May, Sell And Get Out may drive the markets back down.
Investors, unwisely have come to grips with the idea of people having the coronavirus, but they haven't taken into account what is yet to come.
We will have a fallout in commercial real estate as large and medium sized companies reduce space and allow more people to permanently work from home. Also, the dead and severely ill can't contribute to GDP, which hasn't seemed to click for local and national politicians, who have placed rapid re-openings over safe re-openings.
Also, schools re-opening or not, will have an impact on the markets. What I've learned from friends with small children is that school is more a place to send kids while the adults work than it is an institution of learning.
Working parents have had a difficult time during the lockdown working, when they've also had to parent 24/7. If school reopenings are delayed how do working parents work effectively? Do two-income families drop to one income so that one parent can watch the kid(s) full time? Does a grandparent retire early to help with childcare? Do families shift money to hire a live-in nanny?
In an interview with CNBC, economist Gary Shilling, who called the 2008 market crash was also of the opinion that the markets could head downward.
"I think we've got a second leg down and that's very much reminiscent of what happened in the 1930s where people appreciate the depth of this recession and the disruption and how long it's going to take to recover."
The Nasdaq blowing past it's old 2020 all-time high serves as proof that Wall Street and Main Street have not come to fully appreciate the depth of the current situation and the disruption it will cause. Investors should be aware that when new technical highs collide with underlying fundamental issues markets fall.
The rise in the markets off of the March lows has caused investors to ignore what appears to be the most obvious indicators to focus on the indicators that support or give validation to the market's rise off the lows.
If you were hit hard in 2008 from the Great Recession shame on them. If the markets get you again in 2020, shame on you. Be ready for the fall.