Pure Insanity

“In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule.” – Friedrich Nietzsche

Can we all just step back for a moment and consider the complete insanity that is gripping markets?

December ended with the first Fed interest rate hike in nearly a decade after years of talk that rates would rise. The Federal Reserve was lauded for doing the right thing after the financial crisis, supporting asset markets. The time had come, the economy could withstand higher rates, and 2016 looked hopeful.

Then, what happens? Stocks have the worst first week of performance in history. Second week continued to make that history.  All it took was 10 days, just 10 days, for every pundit, analyst, trader, and investor to scream that we entered a bear market. Just 10 days, for everyone to scream that we are entering recession, and that the Fed made a mistake.

What changed?  Nothing except a historic and vicious decline in equities; a decline that Treasuries in the weeks before did not anticipate. The fact that all it takes is but a few days for the narrative to shift so dramatically is utter insanity. To think that we “are entering” a bear market or recession completely disregards data that suggests weakness has been on-going for some time.  Small-cap stocks didn’t “just enter” a bear market.  They’ve been in a bear market for nearly a year now.  Despite such weakness, broad market averages did not respect that fact as only a few select companies masked tremendous weakness under the surface.

This is what the Fed hiked rates into – and in truth the Fed should have hiked sooner even into a bear market to restore some level of normalcy to “cost of capital.”  Why fear a recession or painful bear market?  Recessions are meant to cleanse the system of excess and inefficiencies.  Bear markets are meant to correct overvalued stocks allowing investors who actually do have a long-term vision for their money to buy low.  Instead, a sharp decline in stocks results in the masses who were so bullish on the future to so suddenly change their opinion on what’s to come.