The Great Stock Market Crash of 2016 – part 2

The day before US markets opened this year, I was talking to my wife and I said the US Economy will crash and then Donald Trump will be elected. I’m not sure what went through her head but her face said I love you but, honey, please. Almost everyone still viewed Donald Trump’s chances candidacy as being more than one of those weird blips as crazy. Almost everyone viewed the US economy as fundamentally sound.

The new day, the first day of trading for the US markets, was brutal and things stayed brutal for a while. The VIX (uncertainty index) was frighteningly high. Oil and oil companies took a beating. The news out of China was ugly.

But, things seemed to settle down. The professionals kept saying, meh, it’s going to be fine. But, when you dug into the numbers things were, at best, weak.

Unemployment has been low but hiring has been week and people have kept exiting the workforce. The monsters –Apple, Facebook, Amazon, Google and Microsoft– have been hiring but everywhere else it’s been hold the line or let people go. Economic growth has been edging towards stagnant. And the US Markets have been shuffling sideways for about a year. I’m not the only one who’s been seeing this. For instance, Goldman Sachs announced a few days ago that investors were exiting the market in droves. The only real demand for stocks right now has been companies doing buy-backs; and even that has been dropping off.

This morning, I traded tweets with an economist (Steffen Christensen, @Wikisteff) after he tweeted “I just realized that the current and recent US output gap suggests a recession is imminent”. For historical reasons, I’ve been expecting the market to crash in October but Brexit appears to be this crash’s Lehman Brothers moment.

Tonight, by the time I checked the vote for Brexit only about 25% were reporting. The yes votes were winning with over 51%. And the yes votes stayed above that to the bitter end. Somewhere around 50%, it was all but mathematically impossible for the “no” votes to overtake the lead the “yes” camp had. And, at around 60-70% of the vote counted, even the very careful BBC was forced to call uncle and admit it that #Brexit was going to pass.

Long before the BBC called it, the “oh no they really are going to #Brexit” hit the Asian stock markets, the pound went into free fall (reaching a 31 year low last time I checked) and gold went north with a vengence. As I write this, the DAX is down 8%, The FTSE100 is down 9%, the Nikkei 225 is off 7% and and the broadest US stock market composite, the S&P 500, is down 5%.

I’ve been planning to write this piece for months. The S&P 500 was going to be my illustration. The S&P 500 is just an average of the stock prices of a big basket of US stocks (where “500” is just the number of companies represented).

If you look at a chart of the S&P 500, you’ll see a blue line representing the price. That number jumps around a lot. So, a lot of traders will average that number over a long period of time. The pink and red line are long-term averages. If the stock price is a car slowing down and speeding up in traffic, the long-term averages really tell you the car’s basic momentum. Get rid of the annoyance of stop lights and traffic jams and that average gives you a really good idea of how fast you’re getting somewhere. And those numbers have been going flat: they’ve been converging on about 1845 for some time.

That really isn’t surprising because they are just an average. If you squint at the blue line, it’s been basically been doing the same thing. For almost two years, it’s been going up and down a lot and it always ends up basically where it started.

In essence the stock market has been moving sideways; it’s been stalled and settling down to 1845.

Technical traders will sometimes talk about ‘support’. That’s short hand for finding the last two, ideally three, low points. For the S&P, they’re February 11, August 25 and October 15, 2014. On those dates, the S&P 500 has been almost identical: 1825-1867. Support is important because that’s essentially what buyers thinks of as the low value of the market. Every time it’s hit one of those support numbers, people have rushed into buy and the price of stocks has bone back up.

Any decent technical trader reading what I just wrote will point out what’s obvious to them: if the price goes below both of those numbers, especially if the volume drops (whoops… that was the Goldman Sachs report), people will run for the hills because they have no idea where it’s going to stop. While it may bounce a time or two as some people “bargain shop”, the price basically keeps going south.

If you zoom out, you’ll see that the last time, the US stock markets went into free fall (in 2007), they went from a bit over 1500 to under 800. The S&P 500 keep dropping for eighteen months and lost almost half of it’s value. And once it started dropping the bad news in other areas snowballed. The US financial industry nearly collapsed. Two US car companies and multiple major banks had to be, essentially, bought by the Federal government. And the list could go on for pages.

The drop before that (the one straddling 9/11) was almost identical. The S&P dropped from a bit under 1500 to a bit over 800. The drop took (wait for it) eighteen months and took out many of the early internet startups and decimated much of the telecom sector.

The current magic 1825-1867 range is only about a 170 point drop (8%) from thursday’s close. When I sat down to write this, overnight trading already had the S&P down by 5%. There’s a good chance that the US stock markets will open down by 8%. Tomorrow is very likely going to be an absolute blood bath on stock markets around the world and, if the last two US economic crashes are any indication, the stock markets will continue to drop until over a year into Donald Trump’s presidency.

And, besides the fact I’ve seen Donald Trump’s Presidency coming (oh the joy of being a prophet), the basic fact of life in US presidential politics is that whatever party holds the Presidency when the economy crashes gets murdered come November. And that makes a certain amount of sense because a party’s candidate is carrying the mantle of the policies of the party’s time in the Presidency. In this case, Hillary Clinton has been explicitly running on Barrack Obama’s record in the White House. In the public’s mind, that record on economics was just nuked.

When I talk about After 2016 being a fundamentally different world, the US Economic crash and the Donald Trump presidency are, unfortunately, just the beginning. Over the coming days and weeks and months, I will continue to flesh out what “After 2016” looks like. I just wish I’d done my job, turned into the wind and began sharing that sooner.


Note: Originally released around a bit before midnight Mountain on 23 June 2016. Line editing completed an hour later. Thanks to Steffen Christensen (@Wikisteff), for the some of the information cited. And, any blame for mistakes, etc., lies squarely on my shoulders. Suggestions welcome and comments remain open for a week.