You have to be perfectly sane to invest in this market. One day it’s up a tiny bit. The next day it’s down a smidgen. This market isn’t a casino. It’s more like a game of go-fish with your grandmother.
While the major market indexes, the S&P 500 and the Dow Jones, are perched very near all time highs, they were at the same level two and a half months ago. Markets seem unable to break higher into new territory. At the same time, any kind of selloff is quickly seized upon by hungry investors and stock prices bouance right back.
It isn’t normal. Consider this, the CBOE Volatility Index (VIX index), a key measure of market expectations of volatility, is at the lowest point in 25 years. The current index level of below ten has only been achieved ten times in the history of the index. Since the election, the S&P 500 has only had four moves of 1% or more in a day.
The VIX, often referred to as the “fear index”, is showing no fear, and for that matter no greed either. It’s like the market has achieved a temporary equilibrium. Positive and negative forces are offsetting each other. Let’s take a look at the competing forces.
Here’s the good stuff:
So far, first quarter earnings have been up 11% on average and three quarters of companies reporting have beaten expectations, the best showing in a decade.
Job creation has been solid and the unemployment rate is 4.4%, a ten year low.
Confidence numbers for manufacturing, housing and consumers are through the roof in anticipation of stronger economic growth from promised tax cuts and other fiscal stimulus.
Then there’s the bad stuff:
The S&P 500 is currently selling at more than twenty times earnings, a historically very high level.Climbing much higher any time soon would send valuations to nose bleed heights.
The world is fraught with danger in North Korea, the Middle East and other places.The resulting uncertainty spooks the market.
- Domestic political civil war
It seems the market has at least partially priced in tax reform and other fiscal stimulus.But the political parties are essentially at war and it’s possible nothing or very little actually gets enacted.
The market has risen about as high as it can on hope and confidence in the future. To really get another leg up there will have to be something tangible, like stronger than expected economic growth or passed legislation. But these things could be a while off.
While there appears to be more downside risk than upside potential in the near term, any selloff will likely be short lived. Sure, there are many things that can spook the market at any given time and send stock prices plunging. But then what?
Unless the news in really bad like recession, war or impeachment; money will just find its way back into a cheaper market because it has no place else to go. Bonds and traditional investments like CDs and money markets are paying practically nothing.
At the same time, the longer term prognosis for the market is a whole lot better with a business friendly Administration.
Anything is possible of course and the market has a habit of behaving in a way that confounds prognosticators. But until something changes the current dynamic, the market could be stuck in the current range for a while.
Tom Hutchinson is a Wall Street veteran with extensive investing and finance experience.
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