Monkeys, watching the news over the past couple of weeks, I have only three words for everybody disseminating the market coverage: Enough is enough.
Enough with not knowing basic finance or market theory.
Enough with the wailing and gnashing of teeth over “the next big crash.”
Enough with the apparent “disconnect” between equity prices and the broader economy.
Enough with the loud, passionate statements that are inversely proportional in volume to the actual amount of your market knowledge.
“There is literally no rational explanation for this rally—none!” someone yelled on CNBC the other day. “There is literally NOTHING driving it! NOTHING!!!”
“The rally continues, despite a whole laundry list of reasons why it shouldn’t be,” an introduction to an article on Yahoo! Finance read.
The dust had barely settled after the new all-time Dow high before an enormous number of people started the “time to go short” mantra, often with no more concrete reasoning than “it’s gone too high, too fast, and what goes up must come down.”
No kidding, genius. Did you also know that there is water at the bottom of the ocean?
If someone is that confident in his or her market-timing abilities, go right ahead and put on the shorts—but before you do, remember something very basic, something a lot of folks in our media do not report…
GDP is a (flawed) measure of total output. Stock prices are a result of future expectations on supply and demand. They do not necessarily, and should not be expected, to move in lockstep with perfect correlation.
The naysayers maintain that the current rally is “irrational” because the economy is still lousy in their estimation. But if you bought into the pessimism around March 2009 and decided to just stay out of the market, you would have missed out on the 72.3% rise in the S&P 500 over the next 12 months. And bear in mind the stock market bottomed out before the economy did. Is everything coming up roses for the US economy right now? No.
But the market already priced in the pessimism for dark times ahead—back in 2009. If anything, that shows the S&P 500 is a lagging indicator. You can look back at history too—the best time to be in the market is actually a few months before a recession ends.
So enough is enough. Stop screaming. The Great Humiliator, the stock market, does not care about the nice big round numbers we think are “resistance levels.”
Just because a completely arbitrary and inaccurate index (the Dow) has hit a completely arbitrary and meaningless plateau doesn’t mean it’s time to forget the basics and go short just because there’s still fear in the air.
Well said - I think it's half the media who loves a good story and half sites like zero-hedge which turn even the educated financial professional into a perma-bear.
Not sure how WSO feels about NPR's PlanetM oney but there was an interesting podcast Don't Believe the Hype a few weeks ago regarding the DOW Jones and current market conditions. They did not preach selling short, but offered insight into how market indicators are calculated and which ones we need to be looking at. Maybe a bit basic for most of the readers here, but enjoyable podcast nontheless.
People who complain about what is going on in the market tend to be the ones not making money. They haven't figured it out and need to blame someone else (the Fed, the President, etc.).
I think the larger issue is that equities aren't cheap looking at a longer term P/E average, the next few years are likely to be soft, BRIC growth has/will continue to slow.
This rally in stocks has a lot to do with Federal Reserve policy of keeping interest rates near zero. Interest rates and the stock market have a pretty tight correlation. Even though rates have risen a bit in the last 6 months, interest rates are still at breathtaking historical lows. So I disagree with those that assert the rally is based on nothing--it's been based on cheap credit. As rates have consistently ticked down since 2008/2009 we've seen a huge rally in stocks. This isn't surprising nor does it speak in a large way about the strength of the economy, either today or in the future. If that were the case then we've had some amazingly prescient investors in 2009 who were willing to look 5 years in advance.
correct sir. the correlation exists because when interest rates are super low (near 0%) institutional money is pulled out of bonds and put into equities.
This post is backed hard.
SB
In conjunction with what DC said, the money has to go somewhere, and that is generally where the highest risk-adjusted rate of returns can be found. Bonds are low so the easiest place to earn a better return is in the stock market. As interest rates go back up over the next 2-5 years some money should follow back into bonds. The nice thing about the interest timing though is that, barring other factors, rates should go up as the economy improves which will hopefully buoy stock prices, ultimately leading to a slow-down but it should not (again, with no other factors), go down.
Exactly. I've said it before, a lot of folks here love to complain about our government etc etc etc but all they've done is miss a fantastic investing environment. And pls, no mentions of NPR here, you'll cause 90% of users' blood pressure to rise (and actually that particular one on the Dow I didn't love...while the px weighted methodology is obviously quite stupid, the Dow has actually tracked the S&P ridiculously closely over most time periods, so for practical purposes there's been no harm in using it despite all the academic uproar. Planet Money should fine more relevant issues to report on...)
YEAH BUDDY! YOU GET 'EM!
Agree.Look at it this way: say the economy starts at 100. Then it crashes to 30. After a while, it picks up to 31, then 33, then 35 ...45 .....55 .....70 ....80. The rate of climb is artificial because it's moving towards recovery. It may not get to 100 anytime soon, but even the slow climb back, on top of usual or even slower than normal growth, is enough to make the numbers a bit higher. Will we see a correction? Maybe at the end of the summer there will be a price shakeout, that's what I forsee, not unlike the gold market two years ago. But if there's a crash coming, I'm not aware of any reason why it would....if there IS a crash coming I'd be curious to see some data or concrete ideas aside from "Obumma, he's he's he's the devil".
Politics influence the market, but they are not the market.
Markets react to the Gov't, which is reacting to the markets...
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1923197
Agreed, until the market shows signs of weakness the bulls are going to win. I think a lot of people agree that this rally has little to do with economic robustness, but so be it. The market is driven by passion, not economic metrics. If people feel good about what's going on around them they are going to buy, if they don't feel so good they are going to sell. It's as simple as that. When a company puts out a new "product" the price goes up because people think it's a badass product, not because of what it will do to their margins. I've often thought about going short in the past couple of weeks, but just couldn't get myself to do it. Instead I have pumped money into index funds and high beta equities. There's no worse feeling then be short while the market is running, especially if you are a bull. I would rather be optimistic and have things not quite work out, than miss a rally; even one that doesn't necessarily make sense.
It always sounds so easy linking low interest rate policy to rising stock markets. While there might be some merit to that idea, from an economic point of view the causal relationship is probably different. Low interest rates (more accommodating monetary policy) indicate rising NGDP (GDP * Inflation), which due to wage/price/debt stickiness helps rising GDP growth expectations (money is neutral in the long term, but has a big impact short term). That being said, the Fed policy is most likely responsible for the rising stock markets, but mostly insofar as it helps the economy as a whole.
Explain to me why GDP is flawed. It is actually the best measure there is at the moment.
These two things are not mutually exclusive..
In the end, all the news outlets across the country (and the world) are in it to sell newspapers. They're the press ... it's their job to stir up fear and dissemination.
Can someone please explain to me how if stock prices are rising due to the movement of institutional money into equities caused by low interest rates, how it's sustainable if the money should theoretically exit once/if rates rise again? Isn't that by definition how bubbles are formed? Not to say it hasn't created an opportunity to make money, but it certainly seems like more of a "greater fool" type of thing than any sort of sustainable level based off of real growth.
Whoever said this “There is literally NOTHING driving it! NOTHING!!!” is dumb and should not be at CNBC, how come these people appear on TV if they do not understand simple supply demand concepts.
While I agree that one should not short the market just because it is near/ at all time highs, I think people also need to know that just because the media and "experts" talk the talk, doesn't mean thats how their money is invested. Not sure if this is still the case, but I remembered reading that most institutional investors are near fully invested now right now. If they were actually bearish, I dont think that would be the case.
I am probably wrong, but I just wanted to comment on this for the sake of understanding your point of view. I am not saying that the PM has to hold cash and sit there waiting for a market drop, but there are probably other ways of being invested to take advantage of this move up that does not involve being exposed to US equities (I personally do think the market is overvalued). While you may say clients hound PMs to be fully invested in the hottest market as the reason for them to be invested in US equities, it is the job of the PM to advise and manage the expectations of their clients to make them understand that it is better to underperform a little in a bubble vs. being caught in a herd mentality and losing a large sum of client money along with the rest of the PMs if the market does go down big time.
All rallys since March 09 have correlated highly with Fed QE (same for slumps (no QE)), Check zero hedge for the graph or PM me.
I was just thinking about this today. Do institutional traders really watch this stuff? Most of the programs on CNBC seem to be directed towards the layperson or day traders at the same time they say the average people aren't in the markets yet.
^^^ I agree. There's so much money that's been pumped into the system, it has to go somewhere. If we're all gambling, what do you think will happen to the ante and our bets if somehow the money in our pockets doubled? They would go up too.
Also, you can be bullish on the financial markets but not necessarily bullish on the economy. Its the cliche arguement of main st. vs. wall st. Companies are laying off, deleveraging when possible, stacking cash, and some are showing record profits. Eventually, once sentiment is strong enough, companies will reinvest and these funds will flow back into the "real" economy (i.e. payrolls, machinery, upgrades, pursuit of growth opportunities, etc) and out of equities, which could cause a correction.
How else is he to handle this? Ideally the govt would build/rebuild infrastructure, education, and whatever else they can possibly do to create jobs for middle/lower income folks and stimulate demand. But they're a bunch of morons that can't do their job, and apparently none of them have so much as taken a basic economics course since the early 1920s. So it's left to Bernanke to work with his limited tools. He only has 3 main ways to influence the economy: raise/lower fed funds rate, buy/sell securities (primarily debt obligations held by banks), and raise/lower the reserve rate. He's lowered the fed funds rate to 0/near 0; can't do any more of that. Lowering the reserve rate doesn't do anything because banks are not failing to lend because of a lack of cash, they're failing to lend because they just don't want to. That leaves buying securities which can increase available cash for banks to lend, but again-- it's not for lack of cash that banks aren't lending. All of these can only affect from the top-down, so unfortunately everything he does will be top-down. Right now we're seeing the limitations of supply-side (trickle down) economics: You can only perfect the environment so much before it stops making a difference; after that there must be demand to induce economic investment and create jobs.
I also do not believe the influx of cash into the markets is due to a change in available cash. Cash availability and the equity markets, from my (limited) experience, are about as loosely correlated as the real economy is with equity markets, and for the same reasons. Businesses aren't throwing their money into the stock market as that would be even more risky than opening new stores or hiring. The cash is just sitting there. Chillen. Prolly in need of a friend or two. I wish I had a link to the graph of funds on deposit at the fed but it showed average funds around 10bn from mid 90s - 2008 then all of a sudden 100b from 2008-2011 (when the graph ended).
Wait, are you saying there isn't a strong link between interest rates and stock prices? I mean, it's, well, I mean it's a provable fact...
There is an obvious and provable correlation between the Federal Reserve's low interest rate policies and stock market performance. Graphically and mathematically...this isn't debatable..
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