A Cloudy Crystal Ball for the Markets

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This is the most uncertain and anxious time in the financial markets in my memory. We are a short step from a full blown panic.

Everywhere one turns – stocks, bonds, real estate and commodities, as well as related investment vehicles – there is a high degree of volatility. The pundits and commentators are full of dire predictions fueling the overwhelming negativity.

To be sure, there is more than ample negative economic data to support virtually any bearish scenario. The price of oil is not only at an historic high, but also the full effects have yet to be felt in the broad variety of areas of the economy to be impacted over immediate term. Prices of other commodities, especially food, have spiked recently and don’t seem to be near a bottom. Home prices continue to moderate. This lousy list could go on and on.

My crystal ball is cloudy. I don’t have a strong view whether we are at the bottom, but I strongly doubt it. If forced to make a prediction, I would expect six to nine months of continued decline and distress.

History may provide an interesting context.

Basically, over the last 50 years the equity markets have experienced sharp pullbacks on nine occasions. On four of those nine occasions the market declined slightly in excess of 20%, and on five of those occasions the equity markets declined over 30%.

Now, the pundits have been reminding us that, as of last week, we are officially in a bear market, with the major indices down slightly over 20%.

So I think the proper question is whether this bear market will ultimately, with of course the benefit of hindsight, rank within the group of four pullbacks averaging roughly a 20% decline, or with the five pullbacks averaging over 30%?

Other disturbing circumstances: The Fed basically has its hands tied, the credit markets are bordering on the dysfunctional, and a dangerously high percentage of homeowners have only a slice of equity left in their homes. Many experts believe a 15 to 20% decline from here would not be unexpected.

Given the existing level of nervousness and overall economic weakness, if the correct answer is that this time around we are now not at the bottom, look for some good old-fashioned panic in the not too distant future.

So, for me, I am praying we are at a bottom but I am not willing to bet on it. I feel like I am whistling by the graveyard with fingers and toes crossed.

William E. Simon, Jr., the son of the late Treasury Secretary in the Ford Administration, is an investment banker and President of the Free Congress Foundation. He ran a very close race for Governor of California and continues to be active in conservative and Republican politics. He is a member of the Heritage Foundation Board of Trustees.
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