The market seems unimpressed with the analytical punditry that keeps pointing to an overheated market. Perhaps today is the day a sell-off will occur, but for the moment, the market seems bent on inching higher above the record. Speaking of which …
- Investors and Wall Street analysts rejoiced at the Dow Jones Industrial Average’s record close on Tuesday. Economists were unimpressed. Seen from the perspective of the dismal science, the Dow’s close isn’t a record at all. That is because economists adjust share-price movements for inflation, a factor stock analysts prefer to ignore. Once inflation is factored in, the Dow’s stellar run over the past few years looks more pedestrian and the investors who have ridden its wave less wealthy.
Okay, so let me get this straight. The DIJA is now higher than it was five years ago, higher in fact than it ever has been, and “economists” are saying “don’t get too excited.” I think I have this right. The article that articulates this notion is interesting, if for no other reason than it throws out a detailed explanation for this technically correct but useless perspective.
Here is the reality … If you invested in this market over the past four years, you now have more money than you had four years ago. To suggest anything otherwise is absurd. As well, since one key market fundamental is the correlation between corporate earnings and the market’s current value, does this mean corporate earnings are also not at record heights? Does this mean we should bump up the earnings by the same factor to achieve equally relative P/E ratios? The market is what it is and perception is a big reason it is what it is. Let’s move on to something more helpful.
- When sub-par expectations catch up to signs of improving (economic) health, investors are disappointed faster, causing stocks to lose momentum.
Now we have yet another reason the market will lose steam. Why can’t we just stick with the simplest explanation – the market will naturally rebalance at some point? In this “new analysis,” at least we have a tacit recognition the US economy is getting healthier.
Tomorrow’s employment report for April will move the market one way or the other, as expectations are that the report will show a marked improvement in US employment. Given that the market is still looking for a reason to rebalance, you might consider tomorrow’s report a falling knife.
Moving out of the US, I came across some interesting data about Latin America. I am not sure what to do with this yet, other than to bolster my understanding of the global economy, but it might become useful as the economic recovery picks up steam on a global scale.
- Bumper capital inflows to Latin America are putting the spotlight on shock-proofing policies to help economies digest the rush of investment – and guard against the inevitable exit. Foreign investment inflows to Latin America were more than $280 billion in 2012, according to balance of payment data from countries covering 75 percent of the region’s economic output, similar to the flows registered in 2011 as low interest rates in developed economies pushed investors to seek returns elsewhere. …
Okay, here is a thought … What if these Latin American countries decide to actively pursue monetary policies that discourage investment capital inflows, or at least temper them?
- Rapid inflows can push up currencies, cause domestic demand to overheat, create asset price bubbles and fan inflation, but can be offset by tighter fiscal policy and reforms to boost economic efficiency. Peru and Chile have already done much of their homework, but reforms are pending in Mexico and Brazil.
The above would mean less ROI for investors, which could then send those investors looking for the same or better return elsewhere. This then raises the $64 question – where will they go? Given that the developed economies are currently implementing the policies the LA countries would use (cheap money, low interest rates), where exactly will investors go? If it is me, well, I would look to one of two places – the Asian or US stock markets. OMG. Would that mean more money flowing into US and Asian stock markets over the next year or so, as Mexico and Brazil implement cheap money policies to discourage the high influx of investment capital? Something to think about as the naysayers keep telling us all the reasons the market is defying gravity and economists tell us we are not as good as we think we are in the current market.
Trade in the day; Invest in your life …
