Everything was on sale, but especially stocks, as the Fed raised rates, the US federal government ground to a halt over a $5 billion border wall, and investors were spooked by collapsing long-term interest rates and the specter of a recession in coming months.
More than anything else, however, stocks were on sale mostly because they were being perceived as overpriced, and by most accounts they were and still are. According to Robert Shiller's CAPE index, the week ended with the Shiller PE ratio for the S&P 500 at 26.75, down from the peak of 30 two weeks ago, but still well above the mean (16.59) and the median (15.69) levels.
Shiller PE ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), Shiller PE Ratio, or PE 10
This is how bubbles are pricked, and, as Doug Noland candidly attests, "There is never a good time to pierce a Bubble." More from Noland:
"Expiration for the aged “Fed put” was long past due. For too long it has been integral to precarious Bubble Dynamics. It has promoted speculation and speculative leverage. It is indispensable to a derivatives complex that too often distorts, exacerbates and redirects risk. The “Fed put” has been integral to momentous market misperceptions, distortions and structural maladjustment. It has been fundamental to the precarious “moneyness of risk assets,” the momentous misconception key to Trillions flowing freely into ETFs and other passive “investment” products and strategies. It was central to a prolonged financial Bubble that over time imparted major structural impairment upon the U.S. Bubble Economy."
Noland's entire Credit Bubble Bulletin commentary can be seen here.
If Noland's perception is accurate (and there's little reason to doubt it), this week's cascading declines are merely the end of the first act in what is likely a three-act drama to be played out over the next 12-18 months. Surely, the tremors from February and March were early warnings that the persistent bull market was coming to a conclusion.
October's declines were blamed by some analysts - incorrectly - on the lack of stock buybacks during the "quiet period," and were nothing about which to be worried. Obviously, that analysis was short-sigthed and based upon the bubble hypocrisy that has guided markets since the Great Financial Crisis of 2008-09.
December's nosedive was pretty predictable. Stocks hadn't shown any inclination toward the upside for months and there wasn't a good catalyst for investors, nothing even remotely resemblant of a buying opportunity. Of course, some too the "buy the dip" bait a few times this year and have been destroyed. That concept is a dead doornail for the time being. Selling into any strength is likely to be the prevailing rear-guard action.
Once 2018 comes to an end - in just five more trading days - there will be some regrouping, repositioning, but until there's resolution of some basic issues (the Wall, Brexit, China, tariffs), there isn't going to be any kind of rally. Gains will be hard-fought, and sellers will be eager on short-term wins. The second phase of the selloff will last well past January, into the summer and possibly the fall before the endgame commences, with sellers capitulating en masse. By this time next year it may be nearing a bottom some 40-60 percent below the all-time highs. Investor confidence will have been at first shaken, then eroded, and finally, shattered. Wall Street will have a crisis of its own making, and the economy will be embarking into recession.
Markets have come full circle. Central banks have decided that the experiments of QE, ZIRP, and NIRP which propelled stocks to dizzying heights, are over, their purpose achieved, and now comes the hard work of withdrawing some level of liquidity from markets in an attempt to normalize markets.
The problems lie in execution. It's not going to be easy to take corporations off the baby bottle of leveraged stock buybacks which blew up expectations and prices but caused serious long-term harm to capital structures. This current crisis may turn out to be worse than the sub-price fiasco or the dotcom malaise simply because it involves so many companies that have gutted their balance sheets and will have no other recourse than to slash production, wages, jobs, capital expenditures or all of the above.
This week was a full stop.
There aren't going to be any more bailouts, white knights, back-room deals or "Fed Put." The coming regime is going to be one of hard and cold capitalism, where the strong get stronger and the weak are slaughtered. Wall Street brokerages are sure to be among the most celebrated casualties when everybody realizes these heroes of the past ten years aren't all that bright and that there aren't that many good stock pickers in down markets. The financial industry, already under siege, is about to be breached and downsized to more human and humane proportions.
There's only so much one can say about stock routs. The numbers are there for perusal and they are horrifying enough all by themselves. Hashing over the events of the week, as stocks slid, then rallied and slid more, and finally crashed on a Friday afternoon would be little more than overkill.
It was a very, very bad week, the worst since 2008, and some say, since the Great Depression. It may not have been the worst we will witness however, as this is only the beginning of the bear market.
Dow Jones Industrial Average December Scorecard:
| Date | Close | Gain/Loss | Cum. G/L |
| 12/3/18 | 25,826.43 | +287.97 | +287.97 |
| 12/4/18 | 25,027.07 | -799.36 | -511.39 |
| 12/6/18 | 24,947.67 | -79.40 | -590.79 |
| 12/7/18 | 24,388.95 | -558.72 | -1149.51 |
| 12/10/18 | 24,423.26 | +34.31 | -1115.20 |
| 12/11/18 | 24,370.24 | -53.02 | -1168.22 |
| 12/12/18 | 24,527.27 | +157.03 | -1011.19 |
| 12/13/18 | 24,597.38 | +70.11 | -941.08 |
| 12/14/18 | 24,100.51 | -496.87 | -1437.95 |
| 12/17/18 | 23,592.98 | -507.53 | -1945.58 |
| 12/18/18 | 23,675.64 | +82.66 | -1862.92 |
| 12/19/18 | 23,323.66 | -351.98 | -2214.90 |
| 12/20/18 | 22,859.60 | -464.06 | -2678.96 |
| 12/21/18 | 22,445.37 | -414.23 | -3093.19 |
At the Close, Friday, December 21, 2018:
Dow Jones Industrial Average: 22,445.37, -414.23 (-1.81%)
NASDAQ: 6,332.99, -195.42 (-2.99%)
S&P 500: 2,416.62, -50.80 (-2.06%)
NYSE Composite: 11,036.84, -185.96 (-1.66%)
For the Week:
Dow: -1655.14 (-6.87%)
NASDAQ: -577.67 (-8.36%)
S&P 500: -183.33 (-7.05%)
NYSE Composite: -718.54 (-6.11%)
Everything was not gloom and doom, however. Here's Darlene Love, in one of her many appearances on the Late Show with David Letterman, performing "Chirstmas (Baby Please Come Home)." This is one of her best.
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