A lot of seemingly bearish things have happened in the financial markets over the past year, but the S&P 500 has still gained around 14% in that span. Are stocks really this bulletproof, or is a disaster waiting in the wings?
Let's Recap Some Recent Developments
- Oil plunged 60% in 9 months.
- In the same span, the dollar index (DXY) has risen for nine straight months (assuming it closes higher in March). This over 25% move in such a small span is by far the largest in history.
- Aside from traditional jobs numbers, economic data has been steadily worsening, from housing starts to industrial production to GDP estimates, and perhaps most importantly, earnings estimates for the S&P 500.
If I were to tell you a year ago that these events would all take place over the next year, you wouldn’t have believed me. You also would have probably told me to get my head examined if I said that not only would these events take place, but equities would still rally considerably anyway.
So, What's Next?
We are truly in a unique time in the investing world, where global easy money practices are by far the largest contributor to the pricing of all asset classes. These conditions make forecasting anything difficult, except for interest rates, which I expect to remain historically low for several more years, if not forever.
History shows us that stock rallies can last much longer than most people expect. With global accomodation showing no signs of slowing, it’s difficult to imagine how and why stocks will fall. If they haven’t yet — in the face of these recent historic energy and currency moves, along with declining earnings expectations — what in the world could spark a real correction?
Perhaps the groundwork for the correction is being laid now, and the sell-off will be a delayed reaction. The signs of a housing market collapse (not to mention Bear Stearns and Lehman going belly up) took place in the two-plus years prior to the actual stock market crash, which didn’t really take hold until midway through 2008. Then all hell broke loose, and central bankers the world over were called upon to single-handedly fix the markets and the economy.
What’s different now is that investors expect the Fed and its foreign counterparts to step in at the first sign of trouble. And why shouldn’t we? We’ve lived through QE 1, 2, and 3. Each one of those brought a larger monetary injection. Each was also largely a reaction to equities weakness.
The Bottom Line
A market based not on fundamentals, but on central bank intervention, is not a reliable market. Still, the gains in the equities markets since mid-2009 can’t be ignored (as we always say, the stock tape is the ultimate arbiter). Short term, medium term, and long term, we’re in “overbought” territory. Given the global trend of easy money practices, it’s difficult to say how much that matters right now.
We’ll continue to enjoy the party while it continues. You just don’t want to be the last one to leave.