Tomasz Wisniewski, Director of Research and Education at Axiory Global in his crystal ball prediction on the market economy argues that the current market performance is not an indicator of global economic performance.
The markets initially reacted with one of the sharpest declines in stock exchanged history, then they cooled down and currently they are undergoing a correction phase. The first swing was a true bearish-masterpiece in which markets crashed in record time. Now the question remains; is this all the decline we can expect? And what’s next? A swift recovery, a recession, a great depression, or something else entirely?
In order for anyone to present a clear answer, we’d have to assume that markets and their participants are acting rationally and hence allowing a rational prediction based on rational behavior. However, from personal experience I can confidently say we shouldn’t seek logic in such times, and we should focus on our emotions and what the Central Banks do next.
Under normal circumstances I’d be able to say with near-certainty that the market didn’t correctly discount the recession and another leg down on the charts would be possible and the current reversal would be seen as a mere correction. But the current situation is far from normal. Before going into this I want to clarify what we already know for sure and what we can expect in the near future.
Let’s start with the fact that everybody agrees that a recession is coming. There certainly are many signs; all major financial institutions have been warning about a recession for quite some time, in 2018 and 2019 many experts have talked about a stock market bubble and pointed out that a recession is ahead of us. We also saw an inverted yield curve in November, which has appeared right before every recession since 1975.
I was personally trading during the early recovery from the Great Financial Crisis of 2008 and the second wave of the crisis which affected the Eurozone in 2012, mainly marked by the Greek crisis. One thing I closely observed is that when the market starts reacting negatively to good news, that means the upswing is ending soon. On the other hand, if the market reacts positively to bad news then an upswing is near. How is that applicable now? The majority of financial institutions are prognosing this huge and sharp recession, yet markets are in fact moving upwards.
Furthermore, we’ve been getting ridiculously terrible data from the U.S. job market for a few weeks and more jobs have been lost than the total number of jobs created during the last ten years of recovery. To be precise, 22.13 million jobs were gained in the decade between the last recession and now, but a staggering 22.024 million were lost in 4 weeks – yet markets are still moving up! Bad news would normally crash the market and sellers would be doing most of the work, but if the bears can’t use this historically terrible data to their advantage, then they’re weak or rather buyers are simply much stronger than them.
Buyers have gained power because they are supported by an unlimited buying bonanza from the FED and other central banks. They are supported by Governments’ stimulus programs, which yes, will increase the debt but will also help business. That is currently what markets are pricing in – unlimited stimulus.
Given all this information, we will see new highs on the stock exchange, because the stock market is broken. What we’re seeing now is the stock market breaking free from global economy – it’s no longer a reflection of the economy! This is a giant financial experiment with an unlimited supply of money; hence the market is no longer an indicator of the economy, it has grown a life of its own.