Donald Trump could be one of the casualties of the latest bear market. Photo / AP
Donald Trump could be one of the casualties of the latest bear market. Photo / AP
COMMENT: It had to end sooner or later. In the run-up to Christmas, while everyone was doing some last minute shopping, the longest bull market on record quietly came to an end.
There was no spectacular crash, nor was there complete panic, but as prices moved relentlessly downwards the markets ended up with their worst December performance since 1931 and by the end of the month the benchmark S&P 500 index was officially in a bear market, measured as a 20 per cent drop from its high. So are the tech-heavy Nasdaq, Tokyo's Nikkei and Germany's Dax.
Equities have revived a touch since then, although thin trading between Christmas and New Year when most people are away from their desks means very little. It might well prove a dead cat bounce.
In truth, the average bear market lasts fifteen months, and witnesses a 32 per cent drop in prices. If it runs true to the form book, this one will carry on until the spring of 2020.
And like any bear market, it will have some significant casualties. Such as? The President of the United States, for one, followed by the Federal Reserve, the Fangs and the Unicorns, the cryptos and Germany. They will all suffer significant damage.
The epic bull run that started in March 2009, in the immediate wake of the financial crash, turned into the longest of all time.
In August this year it overtook even the epic bull run of the 1990s. It didn't always feel like it, mainly because while it lasted a heck of a long time it was also one of the shallowest (the S&P 500 gained slightly more than 300 per cent over that time, far less than comparable bull markets).
After such a long run, a significant correction may not be that harmful. It will allow investors to buy back in at prices that aren't clearly wildly over-exuberant.
But in every major bear market, if that is what this is, there are always has some significant casualties.
The President made the mistake of constantly blasting out self-congratulatory tweets claiming all the credit for the rise in stock prices. Photo / AP
So what or who might take the most collateral damage from the bear market of 2019-2020? Here are the five most obvious candidates.
First, Donald Trump. The President made the mistake of constantly blasting out self-congratulatory tweets claiming all the credit for the rise in stock prices.
It could all be explained by his tax reforms, and his roll-back of red-tape, all of which were "making America great again". There was a smidgen of truth in that. The market liked the near-halving of corporation tax in particular.
But smart politicians never tie their fate to the markets, because they know they are completely outside anyone's control.
After so much boasting, it will be hard for Trump to avoid the blame, especially as he will be running for re-election before the bear market ends – something he already appears to have recognised with his frantic attempts to tweet the S&P back up again.
Next, the Federal Reserve. In truth, it is unfair to blame either the Fed or its chairman Jerome Powell for triggering the crash. It is perfectly reasonable to normalise interest rates for an economy growing at almost 4 per cent and close to full employment. But that doesn't mean it won't get a lot of stick.
Federal Reserve chairman Jerome Powell. Photo / AP
It is a generation since there was a Fed Chairman who let the market fall without bailing it out with cuts in rates or some form of quantitative easing. The last one was arguably the stern Paul Volker who left in 1987, and before that William McChesney Martin, who served five Presidents between 1951 and 1970 (and who famously described his job as 'taking the punch-bowl away as the party gets going).
A lot of influential people think at least one of the Fed's jobs is to keep Wall Street rocking, and they are not going to like it if that changes.
Thirdly, the crypto currencies. Bitcoin and the rest of the digital currencies were meant to be the new gold - a safe haven store of value in troubled times. They should be holding their own as other assets plunged in value, as gold has been doing (the metal was up 3.5 per cent over December as equity markets plunged and has held its own over the year).
Instead, they were the bubble that burst first. Bitcoin touched close on US$20,000 ($29,824) a year ago, and then fell relentlessly through the whole of 2018 and it now trading at just US$3,600. Ouch.
Bitcoin and the rest of the digital currencies were meant to be the new gold. Instead, they were the bubble that burst first. Photo / 123RF
It was meant to be an upgrade on cash or gold, but instead it has turned out to be even more volatile than equities, and yet, unlike shares, doesn't generate any income. If that is true, it is hard to see the point of them.
Fourthly, the Fangs and the Unicorns. Every bull market is led upwards by one market, or group of companies.
In the bull market that has just ended, it was the technology giants, with Apple and Amazon both breaking through the US$1 trillion market value level. In the first half of this year, the tech leaders alone accounted for 98 per cent of the S&P's overall gains. Take them out, and there wouldn't have been a bull market at all.
The trouble is, a long period of out-performance may well be followed by an equally long-period of under-performance. It will be even worse for the Unicorns - start ups with a US$1 billion value – many of which were planning to float this year.
Will anyone want to buy into a company as chaotic as Uber when Facebook and Alphabet are tumbling in value? You wouldn't want to bet much on it.
A long period of out-performance by the tech companies may well be followed by an equally long-period of under-performance. Photo / Getty Images
Finally, Germany: In any bear market, there is always one market that gets hit the hardest (after the dot com bust, for example, it was arguably the FTSE which took almost two decades to claw back its 1999 level). What will it be this time around?
Take a look at Germany's DAX. It has already been one of the most miserable performers of any developed country index. It is down 22 per cent from its 2018 peak, compared with a European average of 16 per cent.
Even worse, almost half its members are in some form of crisis, from the auto-makers to Deutsche Bank, to industrial giants such as Bayer. Its giant car manufacturers account for 30 per cent of the index, and the chemicals companies for another 20 per cent, and those are both very challenging industries.
Over this bear market, investors will come to realise how hollowed out and backward-looking the German industrial machine has become.
A bear market is never much fun for anyone. It exposes a lot of flawed business models, over-hyped trends, and inept, incompetent management. Companies that were unsustainable get found out, banks that have over-stretched themselves run into trouble, and central banks have their nerve and skill tested along with ordinary investors. This one won't be any different. It promises to be a rough ride – and it is only just starting.
