Groupthink … The world comes from the classic Orwellian novel, 1984. The basic idea is that everyone is forced to think the same way. This is how I am feeling these days – forces are trying to make me think like the preponderance of “thinkers” out there.
- Investors have caught onto the Fed’s tricks. They realize that the stock market hasn’t been climbing the past few years because the economy is getting stronger. On the contrary, investors have learned that the market’s rise is almost entirely due to the Fed and its program of quantitative easing (QE). And as long as the Fed was willing to pump out the QE, investors were willing to buy stocks.
Resist the hypnotic power of the talking heads and their attempt to make us all think the same thing. The idea that the market growth over the last four years is solely because the Fed has pumped money into the system is nonsense. Sure, the excess liquidity has contributed to a flow of money into markets, but has all of that loose money found its way into equities?
Some of it has, true, but a lot of it goes through the system in the form of banks trading in forex markets, trading commodities, and lending to one another. Actually, more than a lot goes this route. Just look at the price of gold and oil, and notice the continued weakness of the US dollar. As well, check out the capital reserves of the big banks.
Yes, the market can go higher on air, as it has in the past and will in the future, but this market has gone up largely because corporate profits support the higher numbers. If companies were not making money quarter after quarter, do you really believe the market would have found its way to these numbers?
Speaking of numbers, how about that appreciation slowdown in the US housing market?
- The FHFA Index reflecting new home prices rose by +0.3% in August, which was below the consensus estimate for an increase of +0.8% and the lowest amount of price appreciation in over a year.
The above “bad” news is good news, actually. I know, I know, this sounds as Orwellian as the market rose yesterday because of the bad labor report (QE and all that jazz), but at least I have a reason to suggest the lower appreciation is good news, and here it is.
The housing market has been hot for some time. Low interest rates and undervalued properties have driven the market appreciation a bit too fast. It needs to slow down, and it is. We don’t need another housing bubble.
Speaking of housing bubbles … When I was in Spain last year, I saw firsthand how the property values had plummeted because of the hyper real-estate bubble. Like the US and other countries, that bubble contributed to a massive recession. As we all know, Spain has been one of the poster children for lousy economics in Europe, as it has been mired in a deep recession for some time now. Finally, that tide might be changing.
- Spain’s economy may have expanded for the first time in over two years in Q3, with the Bank of Spain estimating that the economy eked out quarterly growth of 0.1% following nine quarters of consecutive decline.
Add to the above, Britain’s long-time coming economic reemergence and one might see what I see – an economic positive turn in the largest aggregate economy on the planet.
- The BOE said that U.K. unemployment appears to be falling slightly faster than expected, while the recovery is stronger than anticipated.
Stay with me on this. The market picture is ultimately about the economic health of the global economy. So, as I always tell you, keep your eye on the big picture. Don’t be fooled by groupthink and don’t let the talking heads get you going on fear because that will take you in the wrong direction. Again, go with the market on this one.
- One of the keys to long-term success in the stock market is stay in tune with the market’s “big picture” environment.
Trade in the day; Invest in your life …
