Where is the stock market headed?
No one knows for sure short or medium term, but since the dawn of man the stock market has headed higher... so the bulls have that going for them, which is nice.
There have been plenty of excuses to sell over the years and the market has always come back, sometimes months later, sometimes a decade later.. but they've come back and surpassed previous highs.
Perhaps it will be different this time?
And maybe it will.
Perhaps stocks will never trade higher than they did just a few months ago.
Perhaps the FED pulling away the punch bowl means the party has ended. Asset prices have topped. And a new age of boring and dull has arrived, with value beating growth by a long shot.. if there is even anything resembling growth in the years ahead.
Less than two years ago it was easy to see the bull market making new highs.
$7 trillion+ and counting... not even thinking about raising interest rates for years to come... and zero concern about asset bubbles...... put all that data into the biggest computer and what do you think it will tell you this means for asset prices going forward?
— UPBOptionMil (@UPBOptionMil) June 10, 2020
And here we are at the opposite side of the spectrum. The FED is concerned.
You could argue that you put all the data today into a computer and that computer will tell you to sell everything and hide it under a mattress for at least five years.
It makes sense. Investors are pretty bearish in reality terms. The FED is not there to prop up asset prices via easy money talk when the market dips.
All those excuses to sell over the years, and there were countless excuses... that ended up being great reasons to buy have lost that reason. The FED.
When you have the lone market participant with the unlimited credit card leaving... you'd be naïve to think asset prices won't suffer in their absence.
One former FED official has stated the FED needs a stock market thats trading lower to help combat inflation.
All the 'data' points to prices falling further in 2022.
And yet here we are.
The market so far in 2020:
- Dow Jones Industrial Average -5.1% YTD
- S&P 500 -6.0% YTD
- Russell 2000 -10.2% YTD
- Nasdaq Composite -11.2% YTD
Not so terrible. It seems rate hike expectations are going up on a daily basis.
Right along with rate hike expectations are the 30 year mortgage rates. 5%....
they've nearly doubled in 6 months.
And yet housing prices have hung in there. As has the stock market. We've had a veritable 1+ year market crash in growth stocks. And yet the mega cap names have done the heavy lifting.
The market bears need those megacap names to tire out. Will they?
Prior recessions and market corrections/bear markets have started at the end of a rate hike cycle, not the beginning.
We are one hike into a 6 or 7 FED meetings of rate hikes. Which means we are still way early in the interest rate hike cycle.
Who can possibly fathom the stock market trading higher amid historic monetary tightening.
We are in a 40+ year downtrend in interest rates! Is that trend about to end?
Interest rate high expectations have gone parabolic. What was unthinkable one month ago is now the consensus for the end of the year.
After 12+ years of relentless dip buying amid extraordinary monetary policy and government assistance, the bear case finally is starting to make sense.
All the excuses to sell over the years was really an excuse to buy because of historic low interest rates and Central bank bond buying. Now without the FED guiding the markets and the cost of capital on the rise... the proverbial tide is rolling out.
And what lies beneath is going to get exposed.
My question is... why isnt the stock market already 20% lower? And since it isnt already 20% lower... is that what lies ahead?
It took me almost a year to get very bullish after the lows in March 2009, when the FED officially opened the pandoras box.
I'm still slanted bullish. I think the market has already looked out at the possible rate hikes and realizes they are unsustainable. The FED's constant rate hike talk and inflation fears have already done a lot of the heavy lifting as far as tightening financial conditions.
Like the FED was late to the inflation party, I think what lies ahead remains deflation. And with that a FED that will never reach its full rate hike potential. Maybe I'm wrong.
Perhaps this inflation spirals out of control. And the FED is forced to slam on the brakes.
And again.. here we are.. the cats out of the bag. The punch bowl is being taken away. And stocks are still not in a bear market? Is this just the start of a nasty cross over dribble to brake the bulls ankles before the bears provide a nasty dunk of the equity market?
Time will tell.
My bullish slant remains:
- Recessions come at the end of the rate hike cycle not the start.
- The market has already priced in much of the downside from current rate hike expecations.
- Corporations are on track to spend more on share buybacks than ever before.
- Japan is in no hurry to stop their bond buying spree and will help offset the FED s dpearture.
- China will be stimulating its way out of the most recent covid lockdown.
On the other side... if our recent Russia Invasion lows fail, I will turn decidedly bearish on the market.
One pattern that has my interest. This past fall....
we are sporting a similar pattern. Head and shoulder type bottom?
If the market reverses and heads to new highs again later this year. That would be some shocker for market participants.
So many times over the years, in the midst of a major market pull back, I've penned an article and ended with new record highs are coming.
Many times the new record highs came far quicker than even I imagined.
This is the first time where I think that new record ending will be challenged. So many headwinds this time around. And without the FED blowing the markets sails... its tough to envision a stock market rallying to new record high prices.
And yet... for some reason... I don't think it can be ruled out. The market so many times has done what so many don't expect.
Why is the S&P500 down only 6% for the year? And is 6% higher from here that stunning of a move for the market? How crazy would that be?
About as crazy as the stock market rallying during the last recession.