- The Dow will retest previous lows as economic reality cripples the bear-market rally.
- Deflation, Warren Buffett, and an economic false start will likely zap investor confidence in the coming days.
- Patient bears will be the ultimate winners when it comes to market timing.
The Dow Jones Industrial Average was modestly higher Wednesday, as all 30 of its components ticked higher after back-to-back losses. Yet again, the optimism was fueled by nothing in particular. Instead, a rally built on overzealous optimism and false hope continued to push the index skyward.
But those waiting on the sidelines for the inevitable stock market crash might not have to wait much longer, as the Dow is probably heading below 20,000 in two weeks.
Deflation Will Crush the Dow’s Rally
Perhaps the biggest threat to the stock market’s recent rally is deflation. The Federal Reserve has been adamant that despite its unprecedented intervention, inflation won’t be a problem. But there could be a more significant issue on the cards: deflation.
Oil contracts went negative for the first time because the world is running out of places to store it amid declining demand due to coronavirus. While we likely won’t run out of places to store excess inventory or unused services, that won’t stop a lack of demand from weighing on prices.
Enter deflation, one of the main reasons for the Great Depression. A rapid decline in the price of goods and services due to low demand creates a domino effect for the rest of the economy. Lower demand equals lower corporate revenue. Lower corporate income equals more layoffs. More layoffs mean less consumer spending. Rinse and repeat.