The bull market appears to show no signs of ending anytime soon. Every recent attempt at a correction (defined commonly as a ~15% drop in the market) was foiled – this occurred thrice in recent months – with market drops of between 5 and 8% followed by rapid rises taking the market higher. The DOW recently swung back up in a range of ~1000 points in less than a week, and has convincingly broken 18,000. So where are we headed in 2015?
Is the exuberance in the market irrational, as ex-chairman Greenspan famously declared many years ago? The third quarter GDP for the United States grew by a whopping 5% – for the largest economy by far – and growth the next year is forecast to be 3%, or a factor of 1.5 higher than the typical annual 2% number desired by economic and fiscal authorities here. While other nations and economic unions appear to be slowing in growth at present, the US is accelerating (the flip side to this is that such increase is essential to ‘service’ the greatly increased national debt). All standard measures – earnings, jobs, income, spending – appear to reflect a healthy economy. The market reflects this health, having climbed to all-time high values reflected by the various indices.
The dollar, which continues to be the currency of choice the world over, has been gaining in strength. Commodities – oil, natural gas, gold, silver, and copper have all been declining in price; some such as oil and natural gas plunging in fact. The PPI and CPI – producer and consumer price indices – have been falling; consumer sentiment is extremely high. This is, no doubt, good news for a consumer economy, translating to lower costs for goods and greater buying and spending capacity for consumers.
Can you see it? The perfect market environment that can, and will, attract the most humble of investors, referred to pejoratively by seasoned market and media players as retail investors? This is the mantra spoken of with little hesitation by most such investors, that it is when retail investors pile on, in their vast numbers, that ‘smart money’ sells and goes to cash. For this is invariably the top of the market, the period of calm before the storm, the last surge upward before the stampede of such buying diminishes, the flood of buyers dries up, and the market in its entirety plunges. And they know this well, for this is a pattern that repeats decade after decade.
Is this a pattern that we – a plethora of small investors – can spot as well? Perhaps. One such is in the plot above. Look at the duration between 1981 and ’87, and the duration from 2008 to the present, ’14. The expectation of Fed Tightening (raising of interest rates, making bonds more attractive, constricting money supply in the market) invariably led to a fall in the year-over-year gain for the S&P500. More than this obvious indicator (we will soon see Fed tightening, predicted to be the middle of ’15), observe the similarity in the plot segment for the two six-year periods – a bit eerie, spooky, no? The Fed has been quite involved in the market in both these durations. For that matter, look at the ’03 to ’07, and ’09 to ’14 segments: the latter appears to be almost an amplified version (thus expanded in the time scale as well) of the former.
Are there any other signs that can shore up such an argument, of a possible plunge in the market? Note that the apparent prosperity seen in the US markets in recovery from the ‘great recession’ may not be anything fundamental, for the US Fed has been busy in maintaining a most accommodating interest rate environment and copious money printing (asset purchases with money created out of thin air, Quantitative Easing – another long discussion – a Forbes Magazine article on the subject) to assist the market and economy. Now all other large economies have, or are following suit, given the slowdown in their domains. How long can nations and economies PRINT their way out of slowdowns and recessions? By law or nature, and to balance their books, the Fed must sell their assets and destroy the money printed, reducing liquidity in the markets…and reverse their low-interest-rate approach to normalize it with what the market itself indicates. They will delay it, and do this gradually, but it must be done, or they risk falling ‘behind the curve’ and becoming ineffectual – and, as the old adage goes, what goes up must eventually…you know.
In recent days, in the three head/shoulder fakes seen in the market, where it pretended to correct, I think there has been a heightening of sensitivity toward a market fall as well. A rise in the rapidity of fear, if you will. Also, in the most recent rise in the market, I did not see star equities reflect the rise. But that may only be a year-end characteristic; all those who wish to hold star equities into the next year may already have procured them. And, in a global market, slowdown in all other economies to which we provide goods and services is surely not helpful in the year ahead.
I would, all considered, be very cautious in the year ahead, and if I do invest, do so for the very short term. I would not, as a retail investor, rush into the market at present as smart money investors hope to see when they wish to sell.
Full Disclosure: I am short the market and long volatility as a retail investor.