May I am being too simplistic but doesn't the current market recipe call for an extended trend down.
Let's look at the ingredients...
-Inflation up
-Dollar down
-interest rates rising
-foreign selloff of US debt
-commodities in upward trend
-Huge tax cut (on capital gains and dividends)
-Nice run up in equities since Oct 2005
To me this is the perfect recipe for the sell side to dump all their equities on the sheep that listen to the likes of Cramer, Kudlow and the rest of the CNBC hype machine.
Readers know I don't expect much for the year. The "ingredients" listed by the reader all make sense to me as negatives except for the tax cut. I could also add this is the worst year in the presidential cycle, the economic expansion is long in the tooth, the stock market cycle is long in the tooth and I'll throw in the deficits too.
There are two important concepts (to me anyway) that are missing from the reader's comment. No matter what you think about the market I think it is wise to know and be able to articulate the other side of your trade. Earnings growth is strong, the economy is strong, interest rates are low by historical standards and the fed is just about done.
Weigh the two sides and draw a conclusion. I still expect the S&P 500 to be down mid-single digits on the year but I am always in touch with both sides of the trade.
The other thing that I think the reader has left out is that even if everything lines up on one side of the trade as he suggests, the market can still go the other way. This happens over and over throughout history, right? The stock market confounds most participants most of the time doesn't it? You can decide if that last sentence makes any sense to you or not but I would not assume the market has to do something. This is a big reason why I do not make extreme bets with client portfolios.
If I think the market has to go down, raise 100% cash and then the market has its one year in a decade where it goes up 30% in a year I will have done real long-term damage to clients. This is a scenario where do-it-yourselfers could do real long-term damage to themselves.
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14 comments:
When things look the worst, the market will surprise you, and vice versa....It helps to recognize that "the market" also looks out into the future, so all the negatives mentioned may not be soooo negative a year from now, and the market has the capacity to look that far out.
Of course, I have no idea. I just know when things are SO OBVIOUSLY bad...weird things happen.
Hi Roger,
You are right, there are two sides to every story.
I am patiently pouncing on what looks like good deals. Recently went long HD and sold some GG puts today.
I still think the near term looks crappy for most of the US market though.
I forgot to mention that my listing the tax cut as negative was because it encourages the sell side (and everyone else) to dump their equities inventory. I'm not in the industry so I may be out to lunch with my line of thinking.
I think Roger is again giving good perspective in times of trouble.
Long term I think this is the best rally in a loooong term bear market I will ever see. I do not think this multi year rally ends here - but I have been wrong before.
KL
Since when does the action of preserving capital cause long-term damage? Lost opportunities are a lot easier to make up than lost dollars.
I'll defer to P. Desmond at Lowry's and R. Russell. They've seen a few things. "The top is in." Time to get defensive folks.
uncle Jack,
Our firm has clients that have hired us in the last couple of years that had no stock exposure in 2003.
The gains from that year could turn out to be more than half the gains for this entire decade.
I believe that to be damaging.
Roger-
Never, ever, EVER argue performance from a cycle BOTTOM. Peak to peak of the cycle is the only informative measure. The rest is cherry picking.
Uncle Jack has a point. The quote is not his, really and there are studies that prove the validity of exiting markets when they are overvalued and entering when valuations are below the norm. This outperforms buy and hold. A 19 PE on a lookback and 10 for a bottom, I believe are the signals for these studies. I think you can find reference to this on Hussman's site.
It sounds like everyone has turned into ‘expert chartists’ (if there is such a thing). The bottom line is that eventually the market conforms to the fundamentals. This has been the case throughout the entire history of the stock market. Let’s analyze the most pungent ingredient – inflation.
“Inflation 101”
Capitalism is based on a free market economy. Supply and demand set the price for goods and services. Liquidity (supply of currency) and cost of currency influence the pace of economic activity. As the supply of liquidity increases the bid for certain items will increase. As the price increases more supply is created. As the supply is increased more products are available to an ever growing pool of consumers. The cycle of wealth is generated through an ever growing supply of goods services and liquidity.
This is inflation. It is not a dirty word. Without inflation the Dow would still be at 1500! Inflation is an intricate part of the macro economic system. What concerns the economists is hyper inflation or excessive inflation. This has a negative effect on the cycle of wealth creation.
Until the markets see tangible evidence that the Fed has not lost control, one should expect some heavy swings in both directions.
Roger has given some very sound advice as how to navigate through the stormy seas that lay ahead. Stick with your strategy but keep an open mind. Don’t panic but don’t be complacent either.
Hopefully the Fed will get it right and coupled with continued earnings growth the second half of the year will be better than the first half. Of course most analysts were predicting the exact opposite.
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This reply was written by a CrossProfit analyst. This is a personal view and may not reflect the views of CrossProfit.com.
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C/P-
No, just observing that the only valid way to measure performance is from the top of a market to the next top. If you ignore performance during the decline and measure from the bottom (or some other equally arbitrary point) you skew performance. What did your approach, your portfolio, you manager do ON THE WAY DOWN? Did they preserve capital? Lose capital? Outperform? Underperform? What you did from 2003 on matters not a whit to me. It may be interesting. It may even be great. But it is irrelevant. Tell me what you did from market top in 2000 until the next market top. Then we can make valid comparisons. There are bullAND bear markets. What you did in one is just a data point, nothing more.
Anonymous,
Point well taken. Roger’s point is still valid. Bulls stay in the bullring to long as bears tend to hibernate excessively. There is no evidence that we are in a bear market. There is evidence that we are experiencing a healthy correction. Notice that the majority of companies with strong fundamentals are holding their own. Those that got ahead of themselves are correcting back to previous evaluations.
As for the last bear market, at Nasdaq 3500 I relentlessly unsuccessfully tried to convince to sell and buy back in at 2000. At 2000 I said sell and by back in at 1500. I didn’t see the 1250 coming. Two out of three isn’t bad.
Disclosure:
This reply was written by a CrossProfit analyst. This is a personal view and may not reflect the views of CrossProfit.com.
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anymouse:
Absolutely correct, the point is not mine in originality, nor is it Hussman's, though he executes very well. I think the best place for learning about over/under valuation using P/E ratios is in Ed Easterling's book, "Unexpected Returns."
Roger: regarding those clients who came to you in 2003, the real damage would've been if they had sold out of stocks just before coming to you. I have a client who went to 100% cash on March 24, 2003 out of fear and lack of contact with his former broker, only to come to me recently after sitting in cash for three years to just now looking for return, as you say, after the big move happened.
The real disservice, and therefore big damage, was in the former advisor not coaching the client to hang in there when he should've, or in not having the communication with the client from the beginning so that the client would know what the plan of attack is should a correction or a bear market develop.
Your 200-day target is just such a plan and I'm sure this site helps with the communication process.
C/P-
No evidence we are in a bear market? What was the period from 2000-2003 in your opinion? 2003-2006 is just a countertrend rally spurred by liquidity and negative real interest rates. We still have a lot of PE multiple contraction to do before returning to historical norms. More to do than that if history is any guide (markets tend to overcorrect on the downside as well).
I am neither perma-bull nor perma-bear. I have lived and invested through '74-75, '87 and some other doozies so I tend not to get too flustered when things revert to mean. I rode the bubble up in '99-00. Got out with 3/4 of it.
My personal opinion is that we chop our way through this til the end of the decade in a very rangebound market. Then the bull can roar again.
anonymous-
Just curious, why is the end of the decade the magic number?
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