If you’re like me and have raised children, you are probably familiar with piling in the family car and heading off on vacation or a day trip. Invariably, hardly any time has passed at all before the children start asking, “Are we there yet?”
It seems we might be asking the same question about the stock market. In past columns I have suggested that we are likely about two-thirds of the way through a secular (long term) bear market. It might be more properly called a secular sideways market — a market that goes up and down in a wide channel that makes everyone crazy, but ends up going nowhere for a long time.
Historically, sideways markets have always followed secular bull markets. At the end of secular bull markets stocks become very expensive — their valuations (price/earnings ratios) get very high. With a slow economic growth rate going forward, this one may even last longer than most. In hoping for the end of this sideways market, many have asked me, “Are we there yet?” Probably not.
Are we seeing signs of a market top? It’s been a rough week for the stock market and the bond market. The concern over when the Fed will begin to dial back its QE-type stimulus is no longer the market’s only concern. The U.S. market is beginning to realize that while it remained bullish and confident that the Fed had its back and would do whatever it takes to keep the stock market rally going; significant shake-ups and declines have been under way for some months in commodity prices, in the majority of global economies and markets outside of the U.S. and in the U.S. economy itself.
Additionally, now the upheavals in the large economies of China, Japan, the Eurozone, Brazil, India, etc., are spreading more obviously to the emerging market countries that were supposed to remain strong no matter what happened in developed countries. Since the beginning of the year, the emerging markets have been looking quite sick. In the past couple of weeks technical factors have been flashing danger signals of an imminent decline being likely. If you have been reading my columns, you know I have been advising caution.
Let’s take a closer look. Last week the S&P 500 was within 1.5 percent of its peak of May 22, and just found support at its 50-day moving average. So what’s not to like? Not a thing according to investor sentiment, which is still very bullish and confident. A poll by the American Association of Individual Investors shows the highest allocation of assets to the stock market since September 2007.
Investors are so confident that margin debt — buying stocks with 50 percent down payments — is at a record level. Sound familiar? Does this bring back memories of late 2007 just before the market peaked? According to the latest consumer confidence reports, American consumers are more confident than they’ve been since before the 2007-09 recession. As Yogi Berra said, “It’s déjà vu all over again.”
So what’s to worry about? How can the market go anywhere but up with so much bullishness and confidence to support it? And what’s up with the heavy insider selling? What are they worried about? Well, there is the fact that those levels of confidence not seen since 2007 are warnings in and of themselves. Extremes of investor bullishness, consumer confidence, margin debt and so on, are always present near market tops. That doesn’t mean that it can’t stay that way for quite a while, but it is certainly a warning signal.
The S&P is overbought above its long-term 200-day moving average to a degree that in the past almost always resulted in a pullback to at least retest the support at the moving average. If that is true this time, it would be a decline to about 1,500. Will that actually happen? Beats me, but it sure gets my attention.
One might ask, “so what?” One line from Charles Prince, the infamous former CEO of Citigroup, is stuck in my head: “As long as the music is playing, you’ve got to get up and dance.” That was Prince’s explanation for why Citigroup continued to originate loans even though risks were starting to outweigh returns, and when it should have been obvious to an astute observer that the situation would not end well. We know how that story played out.
Today investors are dancing because the Fed is “QEing,” if you’ll allow me to make the term quantitative easing into a verb. Right or wrong, the thinking is that as long as the Fed is QEing, stocks will keep going up. Even I have suggested QE is overriding all fundamentals for the time being and as long as that continues, as much as I hate it, you need to be in the game.
The problem is that everyone feels they can get out before the music stops. We heard this before in the late 1990s. Very few got out. “Dancing” is not investing, it is speculating. One of the problems with QE is that the Fed is forcing people to buy riskier investments than they otherwise would have. Stocks are in weak hands, ensuring one great stampede for the chairs when the music stops someday.
I am not issuing a market timing call as I have no idea when this market will turn. That’s why we always stick with our models for diversification and risk management. When the market is making all-time highs it is easy to become complacent, let down your guard and let euphoric media headlines go to your head. Don’t dance, invest. As for when we reach the end of our journey in a sideways volatile market, are we there yet? I think not. We’ll see. Thanks for reading.
NICK MASSEY is a financial adviser and president of Householder Group Financial Advisors in Edmond. He can be reached at www.nickmassey.com. Securities offered through Securities Service Network Inc., member FINRA/SIPC.