Markets are delicately poised as investors struggle to weigh up whether the Federal Reserve's interest rate raising cycle is priced into markets properly or not.
The bull case rests on the view that because the Fed has been so clear about its plans for the rest of the year the market has already discounted stocks by an appropriate amount to reflect tighter financial conditions.
There are also encouraging signs the economy can withstand higher rates, such as high employment numbers and healthy job vacancy rates.
Not everyone is signed up to this viewpoint though. Phillip Toews, chief executive of $2.2 billion Toews Asset Management sees markets at risk of going much lower still. His conviction in this is strong enough to move the assets under his watch to 90% cash in readiness for lower prices.
This is not the first time Toews has pulled money from the market in anticipation of a slump. He correctly reduced exposure in February 2020 to avoid much of the downside from the COVID crash. He also was able to cut his equities position ahead of the worst of the 2008 global financial crisis.
Toews said his investment process is driven by computer algorithms, and the picture they paint currently is not a good one for stocks.
"What the algorithms are designed to do is to react in the early phase of a down market and move to the sidelines. We are fully in cash now and what's interesting about this scenario is that when we move defensive, we have the ability to be in investment grade bonds or short duration bonds, but even all of those positions are now in cash."
"So we're just fully defensive and our perspective is based primarily on valuations, but also on all of the things that we know are happening with Ukraine, and inflation. We will see a full bear market in the broader US indices like the S&P 500 this year."
Toews sees the relationship between inflation and financial assets as fraught with risk and potential downside, and this goes a long way to explaining his current position. He believes persistently high inflation has not been properly priced in yet, and if it remains elevated stocks could have further to fall.
"We looked at the last three episodes of a significant cumulative inflation in the US and there were three times prior to what we're experiencing now where average inflation doubled. So what happened to financial assets? It's really informative in terms of where we are now."
The time periods Toews is referring to are 1915-1920, 1941 - 1951 and 1973 -1981.
"Well, obviously, bonds did very poorly on average and stocks on average actually equaled inflation. So they didn't provide any above inflation gains but they at least matched inflation on average. But within that average, one time it surged. The other two times, stocks fell in real terms."
"But but here's what's interesting," Toews continued. "In all three episodes of high inflation stocks sold off considerably as inflation moved from benign to rampant. So I I think if you look at the history of what has happened with inflation in combination with high valuations and supply issues with Ukraine, potential food shortages globally and all of these issues, it adds up to a very bleak picture for equities markets."
Some markets experts expect the Fed to react to a falling stock market by turning more dovish but Toews warned they should not count on it. He explained that the Fed appearing to step in to support markets in the recent past does not mean they can, or will, do it this time around due to inflation.
In terms of getting back into the market, there is no magic number Toews wants to see the S&P 500 or Nasdaq slide down to. Instead he says the decision depends on seeing stock valuations in a better place, and a reversal of market momentum to to the upside.
"We are driven by algorithms so we remain on the sidelines as long as markets are moving lower. When we say are we bearish, we look at the history of what's happened in the past. Looking at when we've seen high valuations before, we would still be in the early part of this decline," Toews added.
FAQs
Panic selling began on “Black Thursday,” October 24, 1929. Many stocks had been purchased on margin—that is, using loans secured by only a small fraction of the stocks' value. As a result, the price declines forced some investors to liquidate their holdings, thus exacerbating the fall in prices.
Why was Black Thursday so devastating? ›
Many investors—both institutional and individual—had borrowed or leveraged heavily to buy stocks, and the crash that began on Black Thursday wiped them out financially, leading to widespread bank failures. That, in turn, became the catalyst that sent the United States into the Great Depression of the 1930s.
What was the cause of the Wall Street crash? ›
Among the more prominent causes were the period of rampant speculation (those who had bought stocks on margin not only lost the value of their investment, they also owed money to the entities that had granted the loans for the stock purchases), tightening of credit by the Federal Reserve (in August 1929 the discount ...
What happened on Black Thursday? ›
Black Thursday, Thursday, October 24, 1929, the first day of the stock market crash of 1929, a catastrophic decline in the stock market of the United States that immediately preceded the worldwide Great Depression. That stock market crash (also called the Great Crash) is still considered the worst one in history.
What happened to banks during the stock market crash of 1929? ›
Many of the small banks had lent large portions of their assets for stock market speculation and were virtually put out of business overnight when the market crashed. In all, 9,000 banks failed--taking with them $7 billion in depositors' assets.
How did business firms respond to the stock market crash of 1929? ›
Question: How did business firms respond to the stock market crash of 1929 and the subsequent Depression? a. In general, business firms raised prices slightly to make up for decreased sales; when this was not successful, they stopped borrowing from banks.
Why was Black Thursday so devastating Quizlet? ›
Why was Black Thursday so devastating? The stock market lost nearly one quarter of its entire value on that one day.
What were the factors that led to the stock market collapse on Black Tuesday? ›
The 1929 crash was caused by many factors, such as a boom after World War I, overproduction in key industries, increased use of margin for purchasing stocks, lack of global buyers around the world due to the war, and so on.
What happened in the wake of the stock market crash? ›
For most Americans, the crash affected daily life in myriad ways. In the immediate aftermath, there was a run on the banks, where citizens took their money out, if they could get it, and hid their savings under mattresses, in bookshelves, or anywhere else they felt was safe.
What ended the Great Depression? ›
Despite all the President's efforts and the courage of the American people, the Depression hung on until 1941, when America's involvement in the Second World War resulted in the drafting of young men into military service, and the creation of millions of jobs in defense and war industries.
Students may suggest that the stock market crash was big enough or that the collapse of the farm economy was big enough.) None of these alone was sufficient to cause the Great Depression, with the possible exception of bank panics and resulting contraction of the money stock.
What was the largest stock market crash in history by percentage? ›
The largest single-day percentage declines for the S&P 500 and Dow Jones Industrial Average both occurred on Oct. 19, 1987 with the S&P 500 falling by 20.5 percent and the Dow falling by 22.6 percent. Two of the four largest percentage declines for the Dow occurred on consecutive days — Oct. 28 and 29 in 1929.
What is Black Tuesday and why does it mark the Great Depression? ›
Black Tuesday refers to a precipitous drop in the value of the Dow Jones Industrial Average (DJIA) on Oct 29, 1929. Black Tuesday marked the beginning of the Great Depression, which lasted until the beginning of World War II.
How much did the stock market drop on Black Thursday? ›
At the end of the market day on Thursday, October 24, the market was at 299.5 — a 21 percent decline from the high. On this day the market fell 33 points — a drop of 9 percent — on trading that was approximately three times the normal daily volume for the first nine months of the year.
Did the stock market crash cause the Great Depression? ›
The 1929 crash didn't cause the Great Depression outright, with only 10% of Americans invested in the market, but it lowered consumer spending, caused panic that worsened an ongoing recession, reduced corporations' assets and hurt their future prospects, and contributed to a banking crisis.
How did investors react in 1929? ›
The crash frightened investors and consumers. Men and women lost their life savings, feared for their jobs, and worried whether they could pay their bills. Fear and uncertainty reduced purchases of big ticket items, like automobiles, that people bought with credit.
How did the stock market crash of 1929 affect banks invested in the stock market? ›
The crash affected many more than the relatively few Americans who invested in the stock market. While only 10 percent of households had investments, over 90 percent of all banks had invested in the stock market. Many banks failed due to their dwindling cash reserves.
How do investors usually act during a bear market quizlet? ›
Investors sell stock in expectation of lower profits because the stock market falls for a period of time.
What is the bear market effect? ›
During a bear market, market sentiment is negative; investors begin to move their money out of equities and into fixed-income securities as they wait for a positive move in the stock market. In sum, the decline in stock market prices shakes investor confidence.
