Insights & Advice


The Last Hurrah


This holiday-shortened week saw all three market averages grind higher. At the same time, interest rates declined to levels not seen since the Fed announced their intent to taper stimulus last spring.  Welcome to the new world where both bond and stock investors make money.

I can’t remember a time when the majority of stock investors have been actually unhappy with market gains. There is no denying that this appears to be one of the most-hated rallies in recent memory. The last percent or so of the market’s gains have been met with howls of rage from the bears, who are promising that this will all end badly. So far the only damage I can see is to those same bears.

That’s not to say there isn’t an element of truth in their warnings. Fortunately, most readers who have taken my advice are now 25-30% cash, which is more than enough in the event we experience a sudden sell-off. Mathematically, the odds of such a decline go higher along with the record levels of the markets. Warning signs proliferate.

As of today, the S&P 500 Index has gone 379 days without a test of its 200 day moving average. Over the past 50 years, the maximum length of time without a re-test was 385 days in 1995-1996. At the same time, fewer and fewer stocks seem to be participating in this grind higher. Old economy areas like industrials, big cap tech stocks, utilities and energy names are the stand-out winners this month. Volume is also bleeding off in these up moves. For market watchers like me these are definitely warning signs. But most investors don’t seem to care.

Bad news continues to be ignored. The revised first quarter GDP number came in at -1%, which was half a point worse than most economists were expecting. The market simply shrugged that off in a nanosecond. Wall Street consensus says that we should disregard anything that happened in the first quarter because the decline was weather-related. Economists are steadfast in their belief that we will see a strong and sizeable rebound in this second quarter. I hope so.

At the same time, interest rates worldwide are falling. The explanation most offered is that central bankers worldwide are actively stimulating their economies and driving rates lower and lower. As an example, market participants are expecting the European Central Bank to announce interest rate cuts and further easing next week. Japan has been on a massive easing program now for over a year. Again, the hope is that lower interest rates and more stimuli will help accelerate sluggish economic growth globally. I hope so.

Emerging markets, one investment area that has been decimated this year, is now experiencing a revival of interest. Analysts contend that these countries are relatively cheap when compared with developed countries. This is especially true given this continued global stimulus. Prices and economies, it is thought, are bound to rebound. I hope so.

In my opinion, however, all of this good news is already reflected in global prices. It is why our markets are at record highs, except the NASDAQ. Even that average is now only 18% off its record highs last visited during the boom in the early 2000s.

That’s right; it was a time when M&A activity was at a frenzy. It was a time when new issues were gobbled up without rhyme or reason. When companies were no longer valued by any parameters other than they were somehow related to the internet. Does any of this sound familiar? I hope so.

So where do we go from here? One might wonder if this isn’t all leading up to the market’s last hurrah.




Posted in At the Market, The Retired Advisor