We don't need to tell you that it's been an especially gruesome time. The Fed has unleashed truly staggering amounts of cash in order to avoid repeating the mistakes that led to the Lehman Brothers collapse back in 2008, asserts Todd Shaver, editor of BullMarket Report.
They learned from that disaster and aren't eager to see it play out again. Furthermore, they've demonstrated that they're paying attention. And they're willing to back up their vigilance with action.
If you were worried that the ongoing market rout is a symptom of a dying financial institution unwinding chaotically, this should actually be soothing. In 2008, the Fed was unwilling to serve as the buyer of last resort, to ensure that all big banks could meet their liquidity needs.
This time around, there are trillions of dollars standing by to make sure that if an institution needs to sell, a buyer is waiting; that if a bank needs cash to make loans, the Fed is their corner. A latter-day Lehman Brothers would not have to choke on its own assets. This is new and important.
Admittedly, it isn't a great sign when the Fed can see some corners of the credit market freezing over, but we understand that at least a few of the Banks want to trim their portfolios and not many are eager to buy from each other.
When all the major players circle the wagons, conditions get worse and nerves get frayed. A vicious cycle mentality can set, accelerating until someone can't go on. That's what happened in the 2008 credit crash.
The big bank stocks now reflect investors' sense of heightened survival risk, but the institutions behind them are all still pillars of the global economy. The Fed's commitment to buying their assets dramatically reduces the odds that any of them will encounter a 2008-style existential threat.
They aren't going away in any likely scenario. Of course they may face a challenging season as interest rates drop, corporate defaults inch up and the consumer economy gets bumpy . . . but catastrophe just isn't in the cards now. The Fed has seen to that.
Meanwhile, the gloom needs to resolve on its own. The Fed did not waste all that money. The banks will survive as long as the Fed can print money. The stocks will move while that certainty sinks in.
And for now, the stocks are clearly moving. Anxiety is a terrible thing for a market desperate for facts, projections and clear expectations. The selling is indiscriminate and driven more by a raw urge to cut risk across the board and get liquid ahead of an unknown future.
We are looking past the immediate questions toward statistical fact: stocks have weathered every storm, and the long-term trend for the S&P 500 still points up at a steady 8-11% per year. That's over nearly a century of dramatic and sometimes disruptive change, including global war, oil shocks, credit crashes and endless corrections and recessions, great and small.
Most bear markets take 2-3 months to hit bottom, so we could be here until summer. Coincidentally, we're looking for infections to peak by April, after which the 1Q20 earnings cycle will tell us a lot about what the recent quarter did to corporate operations and what management thinks about the current environment.
Then in July we'll start getting 2Q20 numbers to confirm that outlook. The first half of the year won't be pretty, but we would expect things to be back to normal by summer. From the bottom, recovery is usually fast. And of course this particular plunge has been extremely accelerated, which means the rebound can play out faster than usual as well.