Scaling
the heights
Given the constantly
upward movement of the Dow Jones "goalposts", it is no wonder that
investor enthusiasm continues to grow, especially during the current successful
earnings season. If one stays long
enough at the party, only good things might happen...or so the thinking
goes. Nonetheless, one could also make a
reasonable case for caution at this juncture.
How far is the
near-term upside potential for stock averages?
Instead of calling for
an all-out market correction, how about we just forecast for a future a little
less robust?
Look, no one can examine
the data and reasonably argue that growth is anything but exemplary. Capital spending is up, profits are widening,
indicators are positive, and the recovery has firmly taken root across a
spectrum of businesses. Meanwhile,
growth sectors are breaking new price (valuation) barriers and portfolio prices
are skyrocketing. The past seven years
have been the benchmark for benchmarks, no doubt.
In general, this has
been one of the longest, and best, bull cycles in market history. What, then, might possibly put a lid on
future prospects?
Firstly, we must
recognize that sell-offs are not the enemy...they occur and must, unfortunately,
be accepted. When markets "top
out" they provide an important resistance threshold from which new
calibrations of potential probabilities become more efficient. It is worth noting that without capitulations
preceding them, bull cycles cannot exist!
That bit of trivia
aside, the price formations of equities during the last 2 years are consistent
with a choppiness usually associated with red caution lights, if not a deeper
concern about price reversals overall. No
doubt profits are strong today, but they are only one factor, sometimes
manufactured by exogenous influences, that change market multiples over
time. In our estimation, the path of
least resistance, at present, is that we are about to enter, at best, a phase
of trimming the sails and setting a backdrop of cautious confidence.
We are also looking at
the possibility of near term interest rate hikes as providing additional
safe-haven alternatives for those whose risk appetite has already been sated.
A
top...or a correction?
Genuine bull cycles
exist most efficiently in a climate of asset class diversification, rising
consumer demand, and social stability.
At present, very few of those factors sufficiently exists well enough
for us to convert from cautiousness to blazing optimism. Our estimates are that consumer spending
(particularly discretionary, portfolio-earned monies) has limits. A climate of psychological anxiety is never a
good thing for financial markets. The
age of chasing anything because it's "new and shiny", be it dot.com,
or real estate, or taxi cab alternatives, has come and gone, along with a
serious breach of confidence in many of our social and cultural institutions,
including the financial organizations that peddle that kind of hype. A reduction in end-user purchasing usually
precedes a reorganization of corporate balance sheets.
The breadth and scope
of some of these non-market related factors is the most onerous influence upon
equity valuations, and they are not going to go away anytime soon. Even a modest perception shift of consumer
mistrust, or malaise, might likely reverse the course of the bull trend or,
worse, leave a vacuum that might only be filled by falling stock prices.
The enduring legacy of
this historic bull recovery will be its duration and magnitude and, quite
possibly, how it eventually reversed its course.
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