Strategist Mike O’Rourke of JonesTrading has a section of his latest note describing the “bearmageddon scenario” for stocks and the Fed.
He doesn’t say that this is his base case, but he thinks it’s worth pondering a possible path forward that sees the economy weaken, and the futility of QE exposed, boxing in everyone.
The Bearmageddon Scenario is one where the economic data rolls over and turns negative. The reason we are mentioning it today is that this week we have received a sub-50 ISM Manufacturing report. The last two major bear markets coincided with consecutive monthly sub-50 ISM prints. That has yet to occur, but it is something to be cognisant of. Although we don’t have confidence in ADP, if it is signaling weakness in tomorrow’s report, it would be a problem. A Non-Farm Payrolls print around that 100,000 or less level about which investors are concerned would be a real problem. After 18 months of multiple expansion, modest earnings growth driven by buybacks and full throttle monetary policy, a substantive weakening of economic data would be disconcerting to investors. With zero interest rates and $85 billion a month in QE, how would the Fed respond to new weakness in the data? More QE? New weakness would just expose QE3 as a failure. It would also confirm the Fed has wasted the past couple of years relying on QE. We do not doubt Chairman Bernanke’s ability and creativity to devise a strategy to tackle weakness, but it would take some time as it did in 2008. In the interim, markets would re-price significantly. In an environment being driven by Central Banks, finding out they have no clothes would be a scary proposition. The 14% year to date gain for the S&P 500 is supposed to be discounting economic improvement. If that improvement turns out to be weakness, it means many market participants are off sides.
Meanwhile, this prospect only pumps up the significance of today’s jobs report.
Business Insider Emails & Alerts
Site highlights each day to your inbox.