August 2019 was one of the most fear-driven months in stock market history. Not in terms of post-crash panic, like what happened after the financial crisis, but rather “early anxiety” type of fear — the sense of foreboding before the storm, when the barometric pressure is dropping and emergency supply kits are being prepped.
One might assume this is a highly bearish sign for stocks. But that’s not necessarily true. It depends on what happens next. Remember the old cliché, “It is always darkest before the dawn.”
If August was the darkest point of the investor mood for 2019, things could get better from here. And if the pessimism of August is seen as overdone, markets could climb a “wall of worry” toward new highs for the S&P 500.
We saw glimmers of this scenario on Thursday, when equities surged higher on bullish trade war news. The U.S. and China will resume trade talks in Washington in October, sparking hopes of a breakthrough.
The stock market is approaching a kind of bull-bear crossroads here.
August was so bleak, a clear shift in mood could make it a market bottom for investor sentiment. On the other hand, if sentiment deteriorates further, August could signal the start of a new bear market, a U.S. recession, a global recession, or all three.
But what exactly made August so fear-driven?
There were a number of warning signs, some quite rare, some that rarely appear together, and some that have never been seen before, all showing up in the same month. Here are a few highlights:
- The total amount of negative-yield debt hit $17 trillion, representing 30% of all investment-grade debt — and seemingly infected the whole world apart from the U.S. Bloomberg reports that, for all the positive-yielding bonds still in existence, an incredible 90% are U.S.-dollar denominated.
- A whopping $3 trillion worth of debt went negative in August alone — and there is now $1 trillion worth of negative yield corporate debt alongside the larger pile of sovereign debt. This means investors are paying companies, not just governments, to hold onto their cash for them.
- August 2019 saw rising volatility in both directions, with the highest number of plus or minus 1% days since February 2018. (That was the month of a big VIX spike and “volmageddon,” when a popular short-volatility-based ETF product blew up and went to zero.)
- In August 2019, fund flows into money market assets — the ultimate place to park investment cash when the world is falling apart — hit their highest levels since 2009 (another time it looked like the world was falling apart, before markets finally bottomed).
- Thirty-year U.S. treasury bonds hit all-time highs (as the 30-year yield touched all-time lows). The trade-weighted U.S. dollar index also hit all-time highs, breaking a record last set in 2002. The price of gold hit new six-year highs, and the Japanese yen, against all other currencies but the dollar, hit its strongest level in years.
- China’s currency, the renminbi, saw its largest single-month decline in 25 years. Argentina’s currency, and stock market, went into full-blown meltdown, with Argentina’s single-day stock market crash the second worst for any global stock market since 1950.
Any sampling of those events would be notable. To see all of them in the same month is simply incredible.
The Bank of America research team put out a note saying markets are in “the throes of the biggest flight to safety in decades,” said Bloomberg.
Looking at U.S. treasuries, gold, and the Japanese yen — three assets considered safe havens in times of turmoil — the BofA team observed “the largest number of outsized rallies” since 1990 or before.
“Investors have not been so worried about the future in the past 30 years,” said BofA research head Stefano Pascale.
But before you use this information to pack up shop and head for the hills, remember that August could wind up being an outlier. When sentiment reaches historically extreme levels, that sometimes means a big trend change — and in this case, the possible onset of a recession and bear market.
But at other times, a sentiment extreme can be a reversal point. When this happens, the wrongness of the crowd fuels a powerful move in the opposite direction.
This makes it extra important to pay attention now. If August turns out to be a harbinger, that increases the odds of a new bear market and a recession dead ahead. But if the mood brightens in the next few days or weeks, August could be remembered as a sentiment bottom with stocks on the way to new highs.