First of all, one should be aware of one thing: The sentiment in the financial markets is catastrophic, perhaps it has never been worse compared to price development. J.P. Morgan recently published data on how likely CEOs consider an imminent recession. The answer: well over 40% probability and thus the highest rate of all time. In the 70s and 80s there were expectations of a good 30%, since then even the probability of a recession of 20% has rarely been exceeded. According to Bloomberg, Wall Street analysts expect falling prices next year for the first time in more than 20 years in consensus. The AAII sentiment indicator of the American Association of Individual Investors has never been so negative for such a long period as it has been this year. The Leeway sentiment indicator, which aggregates various sentiment indicators, surveys and data from options trading, has also spent most of the year at a panic level that was reached at the height of the Corona crash.
The double blow of suddenly uncontrollably rising inflation, which had been expected in vain for so long that it was banished from many minds, and a highly belligerent Russia, whose behavior evoked reminiscences of the Cold War and even brought the topic of "nuclear war" back to the table, has deeply unsettled all market participants. At the same time, society and the thoughts of market participants were still shaken by the century pandemic Corona. No wonder, then, that market participants are historically negatively inclined. What can or what must now happen to trigger a crash or a progressive bear market?
Sentiment functions as a contrarian indicator, i.e. the worse the sentiment, the more likely and more violent are upward movements. After all, bad sentiment means more potential buyers when sentiment improves. For the scenario of a continuing bear market, the absence of good news is therefore first and foremost necessary, especially regarding inflation and economic outlook. We have seen it in the euphoric reactions to the inflation data, which I have also discussed in detail in the monthly report of the Stock of the Week. Should it become clear that the recession does not occur after all or is only short and weak, the downward movement is also likely to come to an abrupt end. Incidentally, recessions are by no means always accompanied by falling stock prices. If, on the other hand, inflation rises again and a severe recession runs through the markets, then this weak market can drag on for another year.
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For a crash, on the other hand, surprising, bad news is more likely needed. Sentiment is bad and buyers are still rare. A nasty surprise can easily lead to a very unpleasant deep price drop, because the hasty sellers only encounter few willing buyers and the majority waits until the markets have calmed down. We experienced such a case during Corona in the spring of 2020. A sudden rise in inflation and a correspondingly extreme increase in interest rates by the central banks could have such an effect. A drastic escalation of the Russia and Corona issues are of course also candidates. Serious fear of the use of nuclear weapons or a highly contagious Corona variant with a two to three times higher mortality rate than the Delta variant are developments that are likely to panic market participants once again. Ultimately, the America-China relationship remains a great unknown. A drastic escalation in this conflict would open up further incalculable danger potential and send another wave of uncertainty through the markets. In short, should the absolute worst-case scenarios occur, the potential for a real crash is given.
If, on the other hand, we have gone through the ugliest surprises for the time being and the situation remains roughly at the status quo or even becomes more positive, the markets are likely to look upward. In the short term, thanks to inflation data and the US Federal Reserve, much points to rising prices anyway, especially on the American side. In the long term, at this point it is worth looking at the complete history of modern stock market prices and examining the price trend of the last 100 years. The Dow Jones cycle promises enormous gains with a third repetition.
Whether one looks at the Dow Jones or the S&P 500: in both cases three sideways cycles are conspicuous. The period of the late 1920s, the Roaring Twenties until the end of World War II, the 1970s and the last major weakness period from 2000 to the early 2010s. From 1945 and 1980 respectively, decades-long rallies followed, during which prices rose from the lows by more than 20 times. Currently we see gains of "only" around 400% since the low point during the banking crisis of 2008/09. A repetition of the two previous cycles would mean a rise in the stock markets that only ends in the 2040s and carries the S&P 500 and Dow Jones to all-time highs above the 16,000 and 160,000 marks respectively. There have certainly been worse times to buy stocks.
