Its not just share prices falling, look at credit markets
The long-treasury bond price advanced an astonishing 6.6% last week as an emergency cut by the Fed takes interest rates to new all-time lows. The bond market had never seen such weeks before the financial crisis but two weeks in November 2018 when financial institutions where facing imminent default, bond prices advanced similarly to last week.
And again, in August 2011 with financial institutions facing imminent default on their Greek debt, bond prices rose. Long term bond yields fell about 1.5 percentage points from 4.5% to 3% in these crisis weeks. Last week the yield on long term treasury bonds fell from 2% to 1.3%, the lowest bond yield in history.
The Correlation Of Bond Prices To Interest Rates
The lower bond yields fall, the more sensitive bond prices are to changes in interest rates. With Treasury bonds now yielding less than both the measured and target inflation rates, these low bond returns must be temporary. The negative market impact of even a small increase in rates is larger now that rates are so low.
Corporate growth is falling. With the annual financial statement update now 89% complete, average sales growth of U.S. companies is 7% down from 14.6% at the peak 5 quarters ago. The average gross profit margin is down from the highest level ever. This is the first drop in average profit margins since 2017.
This early growth slowdown has already been met with the with the most aggressive response from the central bank since the financial crisis and the Greek crisis. In the earlier cases, corporate growth was already low and beginning to rise. In the most recent experience, corporate growth is still high and falling.
Stock Share Prices vs Bonds
Still, share prices are down a long way relative to bonds. Since the peak in November 2018, stocks are down 34% relative to bonds, but it has only been in the past few weeks that stock prices fell. Shares are now more broadly depressed. The extent of this lopsided and vulnerable stock market is illustrated last week when most stocks performed poorly.
The recent market decline has increased the population of depressed share prices. This is a good opportunity to buy shares of good quality companies with improving growth attributes. Focus on companies with stable growth records and with rising sales growth and profit margins. Avoid companies with weak financial condition. The more stable the pot appears, the better the attributes. Green and gold are good. Red is bad and the more intense the red the more urgent the call to action.