Stock Market Outlook
Just a few short weeks ago, the market suffered a dramatic decline driven by a correction in the white-hot Chinese market. That day, 8% of the value of the Chinese market was decimated, which sent a shockwave throughout the global markets. However, the fear that was generated with that one day correction was quickly put in the past. That fear was all to quickly replaced by the greed of continued new highs in the market.
I tell you my friends; don’t get caught up in this excitement, think about the markets and the correction and what they are trying to tell us. The look and feel of this rally in Chinese stocks is reminiscent of the run-up just prior to the collapse of the internet bubble.
Just a few short months ago the Dow Jones Industrial Average reached a new all time high, moving through the 12,000 mark. A few weeks later we experienced an unprecedented 11 of 12 straight up days (Amazingly, and I thank my “friends” at CNBC for this fact, the last time a string of up-days like this occurred was in 1927 – 2 years before the greatest correction in the market ever).
Shortly after crossing the 12,000 mark, the news networks, including MSNBC started counting down to the 13,000 mark. This is not inconsequential; think about it. The 1,000 point move (from 12,000 to 13,000) represents nearly a 20% return on an annual basis! Now I ask you, are we returning to the heyday of the internet age? Is a new paradigm among us where the 100 year long historical return of 10% to 12% is being replaced with one focused on 20%+ annual returns? Is the news media now openly suggesting regular returns of double the historical average? It makes me worry.
This current market upswing has shaken off concerns that have been overwhelming the market recently: the sub-prime mortgage industry debacle, the heartache from collapsing real estate prices, and now a shaking confidence in the US consumer. The fall in consumer confidence is nothing to be overlooked, it is the most likely element to behead this growing market. Lower spending leads to lower company revenues, which lead to lower margins, which lead to lower earnings, and we all know what happens when earnings fall. Stock prices come down with them.
Consumer confidence is a fickle thing and predicting the future buying habits of the US consumer has proven quite difficult. However, one big reality is going to hamper the future of consumer confidence; the collapse in real estate values when combined with and the decimation of the mortgage market and tightening credit trends is going to hurt. The American consumer is now no longer able to use their homes as an ATM.
On top of all of this, we have the potential cyclical pressure of a coming bear market. Looking back over the last hundred years or so, we find that the average bull cycle lasts for just over 7 years. Think about that, of all the bull markets – some long and some short – they all average out to just over 7 years. In case you don’t have a calendar handy, we are now 6 ½ years into this current bull cycle.
This is like being in a dark bar when they start to slowly turn on the lights. So, is the market going to head lower from here? Probably not in the short-term, but it pays to start approaching your investments with more caution.
Category: Stocks
