It is Wednesday, the hump in the middle of the week. It is also the third day in a row the market is in the red and because it is down again, the breathless media needs a reason to explain the minor reversal.
- Stocks held their losses Wednesday, with the Dow and S&P 500 on pace for their third-straight declines, amid renewed concerns about when the Federal Reserve will begin tapering off its asset purchases.
No point in dealing with this. It seems the go to story now is that fear of QE tapering is the reason for any downturn. Then again, there are those in the media who are not jumping on the QE bandwagon. There are those who think the President Obama cancelling the summit with Russia’s President Putin is the reason the market is down today. Perhaps, just perhaps, the simple paragraph below tells the simple story of the market this week.
- We are so used to the markets going up that a brief pause is being met with the usual hand-wringing. Simple fact is we have thin liquidity and much of the volume for the next several weeks will be among the lightest of the year. In other words, don’t read too much into what happens.
The above is not bad advice in my book. Everybody chill. The big picture and the economic fundamentals are shaping up for a long-term spurt, and that is what truly matters. You can’t, you say. You feel you need to protect your money. The past has conditioned you not to trust the market. Okay, if the past plays into your market strategy, then consider the thesis below from Michael Santoli, a writer for the Yahoo Finance blog.
- It’s just about the most audaciously optimistic investment opinion one could utter, yet a relative handful of Wall Street voices is beginning to say it, out loud and assertively: This market has passed through a “1982 moment.”
For those of you not keeping abreast of your US economic and market history, here is more to explain the notion of a ‘1982 moment.’
- Beginning unheralded in the Rust Belt, oil-embargoed, inflation-whipped malaise of 1982, stocks began what would become – with occasional rude downside interruptions – an 18-year renaissance, ultimately rising 14-fold until forming the most extreme and vulnerable of bubbles culminating in 2000.
Yes, that is correct. For 18 years, until the technology bubble exploded in 2001, the market went up and up and up and up. True, Black Monday appeared in 1987, and the US did experience a mini housing collapse and a recession for about five years in the late 1980s and early 1990s, but mostly the market went up and up and up.
Ah, but today’s market is so different from the market of 1982. Today, the now four-year run is because of the Fed’s unprecedented economic stimulation and that is not sustainable.
- The idea that the current four-plus-year uptrend could signify a vaguely similar multi-year move goes against the more popular view that stock prices are enjoying a pleasant but unsustainable upside interlude, pushed aloft by the uneasy-feeling easy money from central banks and companies unduly flattering their results with miserly cost-cutting, cheap debt and stock buybacks.
It is a funny thing in life, but, often, the more things change, the more they stay the same.
- Federal Reserve policy was deeply distrusted in the early ‘80s, when investors worried the Volcker central bank would tighten too much and prompt another recession, as it did in 1980. Today, investors fear the Fed will remain too stimulative for too long, and/or will botch the process of normalizing policy.
Don’t be so certain if you think the Fed is setting the market up for a big fall. Mr. Santoli lays out quite a compelling case and he sets it up with a notion that I have espoused more than once – the market r us, a collection of humans that act, well, like humans.
- Details are always different in every cycle, but crowd psychology doesn’t change in its rhythms and habits. A Big Mac is drastically different from buffalo meat eaten in the 18th century, but the body metabolizes each protein molecule the same. So it is with the way markets – or collections of profit-seeking, loss-averse humans – ingest and respond to information patterns.
Okay, so I have also stated over the years that what is now is different from what was then, so we should be careful about drawing comparisons from different eras, but as Mr. Santoli points out, it is what it is, and to dismiss outright is, well, just not right.
- Just over four years after the August 1982 low, as 1986 ended, the S&P 500 had gained more than 130% – quite close to the 140% or so the index has risen in the 54 months since the March 2009 low. From that point in the ‘80s, stocks melted up through summer of 1987, crashed by more than 25%, then resumed their rise, ultimately gaining 50% from the end of 1986 through 1989. It would be foolish to assume this is a close model, of course, but there it is.
All I am saying is that history does repeat. When you add that potential to the current set of economic conditions and you factor in that August brings us the dog days of summer, the time when folks, even big money folks, go on vacation, take a break, or just otherwise stop paying real close attention, you have a listless market. It is a market willing to go down because President Obama and President Putin are having a spat and the media is relentlessly saying QE tapering is coming and that is bad. Go have some fun, will ya?
Trade in the day; Invest in your life …
