It’s the fundamentals, stupid. My play on James Carville’s famous line (and book of the same name) from Bill Clinton’s 1992 presidential campaign is a reminder that sometimes one can over analyze a thing. In this case, the “thing” is the market. We got charts, we got cycles, we got history, we got stats, and we got obscure patterns all pointing to imminent market direction. Some even point to specific landing zones in specific timeframes, up and down.
Now, some of the “predictions” will be right, if for no reason other than a coin flip has only two possibilities. For my money though (and it is), the best market trend predictors must include both economic and market fundamentals. As I always say, in the end, the market only cares about one thing – are businesses making money? If the economic fundamentals suggest that businesses will not make money, the market goes down. If the opposite is true, the market goes up.
Of course, something such as Cyprus, an ongoing EU debt crisis, an earthquake/tsunami wreaking havoc on the world’s third largest economy, US politicos playing with the US debt ceiling, or wild rumors can alter the market dramatically for a period. But, in the end, the “trend is your friend” is a reality, and the long-term trend is always based on fundamentals. Look at the whole year of 2008 to see an example of a downtrend based on fundamentals and look at the last four years to a see an uptrend based on fundamentals (businesses making money).
Fundamentals are the reason I have been pushing the market upside for the last four years and they are the reason I almost totally disregard the analysts who present anything sans fundamentals to “predict” a change in the current market trajectory. Sure, we will have corrections, consolidations, and outright news bumps here and there, but the trend will not change until the fundamentals indicate a long-term period of businesses making less money. Right now, this is not the case. The US economy and the overall market are stable because corporate earnings, market valuations, and the engine of the US economy (the consumer) are stable and in line with reality. For example, consider the following statistic.
- As of March 6, deposits at U.S. financial institutions surpassed loans by $2.03T; a month before Lehman collapsed, loans exceeded deposits by $205B. In 2012, households put $1.04T in Treasuries, up from $648B in 2011.
The above is financial stability in a nutshell. In fact, it demonstrates a certain fear still resides with the US consumer, but it all also demonstrates a certain financial stability for the US consumer. As well, it shows, like the market, the US consumer is building a solid base, a place from which future spending and investment will come. The first quarter of this year indicates that has begun. Although not the “Great Rotation” many speak of (not yet anyway), money is moving back into equities strongly and consumers are increasingly buying expensive things, such as cars and houses.
Cyprus is just the latest bad new bump in the current market trend, and it might lead to a correction (not huge), but has that news really changed anything regarding current market trend?
- Look at almost any daily or weekly chart of your preferred risk barometer, like the S&P 500. Call it crisis fatigue, call it simple experience with how EU bailout deals tend to be done at the last minute. The current risk rally was stopped last week but hardly dented.
There are still headwinds out there that will temporarily shift the market trend. US politicos have set the stage for another US debt-ceiling debacle this summer and Europe will continue to struggle with its debt and its economy in 2013. Oh, and don’t forget, the market will react to every breath of the Fed. Will it or will it not remove the cookie jar?
So, here we are on a Monday morning after the latest “crisis” has come to a resolution. The market opened in the green, has since moved strongly into the red, and it will probably go back and forth throughout the day. Same old, same old, the market needs to do what it needs to do in the near term. No matter, though, because the reality is the trend is up, and it will continue up unless the fundamentals change and right now, that just doesn’t look to be the case.
- Senate backs online sales tax measure. The Senate has voted 75-24 to allow states to collect sales taxes from online retailers with $1M+ in annual revenues and no presence within a given state’s borders.
The above simply means more revenue for the states with little pain to the consumer. Fundamentally, this is a good thing.
Trade in the day; Invest in your life …
