East is East, and West is West, and never the twain shall meet. Kipling?
Trading is trading, and investing is investing, and never the twain shall meet. Buffett? Actually, no. Though he's frequently insinuated as much.
"The stock market is designed to transfer money from the active to the patient." That's Buffett. And it conveys the same message.
So, why do investors so often constipate their savings and investment efforts with short-term trading endeavors that deride from their long-term objectives?
Traders should focus on the next ten minutes. Investors should be concerned with the next ten years. As these separate disciplines encompass vastly different objectives and timelines. Still, investors all too often forget. Compromising long-term results with ill-conceived, short-term activities. Busy work for sake of being busy.
This affliction becomes all the more apparent when markets sharply change trendlines. As has recently occurred. Leaving everyone to ask: Is this a bear-market rally or bull-market resurrection?
Question of the day. But does it really matter? If you're an investor, should your plan change based on the answer? Be very careful. Most car wrecks occur when drivers make split-second course changes.
Investing? No different. Beware sudden course changes simply because the market suddenly changes direction. Lest you wreck your nest egg and injure your chance at financial autonomy.
Now, let's consider what's going on.
The European Central Bank lobbed another mortar round towards the threat of deflation on Thursday. Cutting interest rates even further. Expanding its bond-buying program. And introducing a new bank-lending program.
Once investors had a chance to evaluate the move? They loved it.
The S&P 500 and DJIA moved above their 200-day averages for the first time since December. Which places stocks at a technical resistance level at which they've been stymied on myriad occasions since November 2014. Each episode ending in similar fashion: stocks touched resistance and careened lower.
So, will this time will be different?
As the S&P 500 rose these past few weeks, P/E ratios expanded. Hitting roughly 17.4x. Meanwhile, earnings estimates continue to fall. And with the S&P 500 at roughly 2,030, based on $121 consensus numbers for 2016, the forward multiple remains 16x. That assumes 8 percent earnings-per-share growth. Which may turn out to be hyper-optimistic, at best. Hopelessly illusory, at worst.
Here's why.
QE, ZIRP, Operation Twist, et al were created to boost asset prices. So creating wealth and boosting consumption as people saw increases in net worth. Appreciating asset values were the critical element. So, the Fed filled markets with liquidity, driving investors further out on the risk curve as the idea of keeping capital in low-yielding money markets became less attractive.
Recently, however, stock prices became intransigent. Defying the Fed's wishes. They stopped cooperating. In fact, they protested. And went in the opposite direction.
Traditionally, stocks followed the economy. Growing economy? Increased earnings. Rising stocks!
Today, post-Credit Crisis, asset prices are supposed to drive the economy. So, if asset prices fall, or worse - don't respond to liquidity injections - the U.S. finds itself with a slowing economy or (gulp) a recession.
Which is all to say that the U.S. economic and market systems have inverted. Asset prices now move the economy. If they don't? No worries. The Fed stands on the ready with new reflation tactics. New acronyms to add to ZIRP, TARP, NIRP and QE.
So, equities have risen, of late. We question the near-term trend. Energy remains in dire straits. Oil touch $38 last week. But we won't swoon should dinosaur goo decide to head lower once again. Wall Street and banking remain mired in their own earnings recessions. And now, as these firms have begun to cut capital expenditures and employees, we'll not be shocked by more pink slips and further revisions to earnings estimates. All of which only brings us closer to a fourth straight quarter of falling earnings reports.
Moreover, the final year for two term presidents? Not pretty. Especially when the opposing party claims the White House that year.
1920 saw the Dow lose 32.9 percent. 1940, down 12.7 percent. 1960, it lost 9.3 percent. In 2000, the DJIA dropped 6.2 percent. And as recently as 2008, it fell 33.8%.
But guys, many exclaim, the GOP is such a mess, there's no way Hillary could lose?!
Think again. Hillary faces intense competition for the nomination. Which could dial up should the FBI decide to indict her. All the while, polls show her losing to three of the four remaining GOP candidates. When anything can happen? It usually will.
Remember, the market has little concern for whomever occupies the White House. But, for shoots and giggles, let's look at how the two leading candidates might impact investor's lives.
From a technical perspective, the S&P 500 crashed through resistance at 1,950. Which we thought would bring a sell-off. A temporary retrenchment. But it did not. And now the S&P 500 sits right at the next battle line, 2,020 to 2,030.
If oil retrenches (it's above $40!), or Europe's problems reignite, or the Fed so much as sneezes during an upcoming FOMC meeting, we'll likely see another storm of selling. If skies remain clear, however, the market could move higher for the time being. That said, stocks will be looking for reasons to sell off as the calendar year ages. Especially as the election draws near.
That's how the tea leaves read for now.
In Europe, things have gotten interesting.
Multiple times these last few years we believed that the time had arrived for European equities. Following the dramatic losses of the credit crisis, and tepid gains thereafter, we believed that European stocks were preparing to do what they'd done for most of the previous two decades: outperform their American counterparts. Alas, to no avail. Deflation fears. Migration crises. Political upheaval. All serving to keep Euro stocks in check.
Today? The spread on European stock dividends and German bonds yields hit an all-time high. Traditionally, when European-stock yields pay three percent or more than German bonds, that spread diminishes in the period that follows. Sending European stocks markedly higher.
Granted, we've identified such opportunities on multiple occasions these last two years. And every time, Europe has soon thereafter stumbled upon the next calamity. Causing stocks to abate. But, maybe this time we'll see Euro stocks return to the business at hand.
We'll be watching closely.
In the energy patch, oil continued its bullish ways. And the International Energy Agency chimed in. Stating that, while the worst may not be over for oil prices, there is evidence that prices may have bottomed. As production cuts from U.S. shale and non-OPEC producers combined with the realization that Iran's production may be less than was expected. Sending prices for dinosaur goo up to multi-month highs at $38.
One last point. Many clients have noticed that we've next to zero allocation in small caps. Here's why.
Through the Tuesday close, the S&P 500 is down 1.5% for the year. While the small cap Russell 2000 is down 6.1%.
According to Bespoke Investment Group, Tuesday marked the 50th day of trading in 2016 and so far the R2K's daily return has outperformed the S&P 500 on only 19 of them. The lowest reading through the first 50 trading days of the year since 1979. The only one close was 1997.
So, while small cap equities have lagged, we maintained a lighter allocation. In fact, we own next to nothing in the asset class. But, those peppy little overachievers will seek mean reversion at some point. When they do? We'll be there to greet 'em. Stay tuned.
Weekly Results
Major markets finished up last week. The DJIA gained 1.21 %, the S&P 500 jumped 1.11 %, and the NASDAQ rose 0.67 %. Small cap stocks gained 0.52 %. Also, the 10-year Treasury bond yield rose 10 basis points to 1.98%. Gold finished down $9.60 per ounce, or -0.76% last week.