As we flirt with a level of 1040 on the S&P 500, a point crossed one way or the other at least eight times in the last 12 years, it’s probably a good time to consider what the economic and social landscape would look like should a new bear market shape up as the leading trend.
Nothing puts a crimp in confidence more than declining stocks… not even home price deflation.
Back in 2006 home prices started to turn down across the United States and by mid-2007 it was fairly obvious to most astute observers that the decline in prices would be substantial.
Yet, stocks kept moving up and consumer confidence and retail spending remained, more or less, near the peak seen for the entirety of the aughts.
Even as stocks topped in late 2007 it could be argued that most Americans were unaware of the severity of the oncoming financial crisis and the impact that it would have on their future.
By the close of 2007 home prices had already come down nearly 10% yet the impact of the deflation of the largest asset that most households will ever control did not, oddly enough, appear to most to constitute a crisis or a cause for panic.
Though daily observers of housing and the macro-economy will likely consider the whole period of 2007 and 2008 to constitute one long brewing crisis, it took until stocks plummeted in late 2008 for Americans more broadly to wake up and panic cutting spending and bringing on a collapse of global trade.
The moral here is that declining stock prices apparently work to hit Americans in the “here and now” whereas home price deflation comes with a slower realization of loss of wealth.
So with stocks on the decline yet again, it’s important to consider the potential impact.
Yesterday the S&P 500 closed at the lowest level since November 2009 cutting the gain since March 2009 considerably.
Should we re-enter a bear market “sell into the rally” mode as was seen during the long slow slide of late 2007 to September 2008 it would likely work to depress sentiment and cause households to retrench.
If we are heading back for a re-test of the March 2009 lows… beware!