Monday, October 21, 2013
Stage Setting: Today's Market Environment
Bad news, negativity, and fear sells. For this reason, there are always more financial analysts in the media predicting market crashes than rallies, and CNBC tends to focus on hurdles to investment growth rather than optimistic indicators.
However, on October 16th, the day congress agreed on a debt deal, Josh Brown (one of my favorite analysts) took an alternative approach and itemized the positive factors in today’s investment environment. Here is what he came up with:
· There is a debt deal in the works that removes the ceiling and related draconian cuts from the discussion until at least February. Out of sight, out of mind.
· There is no election this fall.
· There is no war with Syria and high level talks are happening with Iran for the first time in decades.
· The incoming Fed Chairperson is the most dovish in the institution’s 100 year history. There will be no taper talk whatsoever so long as employment data remains muted.
· Stock markets around the world are selling at fair to absurdly cheap valuations.
· The banks are as highly capitalized as they have ever been.
· Home prices are back to long-term trends and appreciation continues despite the recent mortgage slowdown – normalization being the operative word.
· US households reclaimed the 2007 peak in total net worth and have now surpassed it.
· Small and mid cap stocks are at all-time highs and yet still under-owned by the largest pools of capital in the US – pensions, endowments, and insurance companies.
· Going back 110 years, when the Dow has been up during the first half of the year, it has finished the year strong with gains during the second half of the year 70% of the time.
· Hedge funds are at their highest net short positions since January and have massively trailed every equity benchmark you can think of.
As my clients know, I don’t consider myself to be in the business of predicting market movements. My job is to create balanced, diversified portfolios with an appropriate amount of risk for my individual clients. Frankly, I don’t believe anyone is capable of consistently forecasting investment returns correctly. However, I do believe Mr. Brown has done a good job of itemizing the factors in today’s world that could potentially lead to a positive investment environment with lower uncertainty than normal. He named his article “Rocket Fuel” and the five day period after the piece was published resulted in the best one-week gain for the market in over three months.