The stock market is on fire. As negative, dour, downbeat, and gloomy was August, the market this fall (early fall), is contrastingly, positive, nonchalant, optimistic, and even euphoric. So it goes; a fast 11% sell off over 6 trading days, on little more than poor sentiment, and a 3% Chinese currency devaluation, followed by an incredible global recovery on dramatic global central bank stimulus and, well, things not being quite so bad in China (for now).
In retrospect, it’s always easy. The economic machine works as a process (using Ray Dalio’s terms), and short of a deep freeze of liquidity, economic activity doesn’t shut down over night. The global economy isn’t ready to slow dramatically; the US is still too strong, and global central banks still too eager to fire bullets at slowdown demons. In the longer run, economic adjustments, and financial markets, run towards an equilibrium course set by all the participants, but in the short, and medium term, the market runs in odd directions, often for extended periods of time.
The lay of the land:
The US stock market is within spitting distance of all-time highs. The momentum of the current rally is breathtaking. The market will likely be at an all-time high by today, later this week, or next week. This result appears in the cards based on technicals and improving sentiment alone. This isn’t your typical all-time high in the market though. Why there is reason for caution ahead:
1) The market rally undoes a dramatic 6-session, 11% selloff. Impressive to work that off in a month, but it gets things back to where they were. A rally from a sharp correction is different than a rally from a stable base.
Headwinds the market feared in August may have been overblown, but the headwinds still exist:
2) Fed rate hike cycle still set to begin (probably in December now) and the world will still need to digest
3) China’s economy continues to undergo what will be a painful and choppy economic transition
4) China’s stock market and corporate sector is still exposed as manipulated, statist, and vulnerable
5) EM is ill prepared to lead global economic growth
6) USD strength is back and will persist
7) Global central banks continue to fire stimulus bullets. This will continue indefinitely, until currencies collapse or inflation explodes.
It’s funny how the 2015 market found a way to disprove and dispirit both the bulls and bears alike. Investment returns are hard to come by and some of the highest profile “professional” investors are experiencing horrible years. CJF was chagrinned to position for the sell-off on the way down, only to overstay the welcome, and give all the excess returns back on the way back up. It’s difficult for all market participants; markets are rarely easy – that’s ok, it keeps us all sharp.