Whatever leads us to year end, most of us look to each new year with a sense of hope, even if not a sense of positive expectation. 2009 witnessed a transformation from the worst economic disaster in the lives of most of us to a rescue that the majority could not have envisioned just a year ago. With the U.S. consumer flat on his/her back, our government decided that it would pledge the assets of future generations toward rescuing our banking system, our automobile industry, major parts of our insurance industry, state budgets and a variety of other special interests. As a country we have always argued that capitalism is our economic foundation. Interestingly and ironically, some of the loudest voices promoting government bailout of the financial system were some of the staunchest advocates of laissez-faire capitalism. Once the major banks and insurance companies were off the endangered list, however, those same voices resumed their strident opposition to government interference.
To date Wall Street has largely been saved, yet most of Main Street remains in peril. Much more government largesse has been promised, but it is far from certain whether the most dramatic intergenerational transfer of wealth will ultimately result in a stable and thriving economy. We do know, however, that repaying the resulting debt will serve as a millstone around the economy’s neck for generations to come unless we choose to default or inflate it away. We will address the longer-term picture in subsequent blog posts and in our year-end commentary. We close 2009 today with a look at factors having the strongest influence on our short-term outlook.
The most obvious force affecting the stock market over the past many months has been positive momentum. There is a lot to be said for the law of physics that a body in motion tends to stay in motion. Even investors with a cautious or pessimistic fundamental outlook have become momentum players, since stocks have risen so persistently without any significant corrections. As a result there are many less than bullish investment managers with portfolios full of stock. They will benefit if the positive momentum continues. They could be hurt badly if a major geopolitical event suddenly shakes world confidence.
Economic statistics, both national and international, continue to improve for the most part. As mentioned in prior blog posts, the percentage gains in most of these economic indicators have been impressive, simply because gains are coming off severely depressed bases. Despite positive progress from the lows, most of these economic readings remain low on an absolute basis, many still at levels observed years ago. Unless some surprisingly dire economic data present themselves, investors will likely continue to interpret improving economic statistics as bullish, despite their weakness on an absolute level.
As we examine market technical data over multiple time frames, we currently observe very diverse messages in those various periods. Over the very longest time frame, comprised of secular cycles that average about a decade and a half in either their bullish or bearish mode, we remain in the bearish cycle that began in 2000. We expect that this cycle will endure for several more years. We will discuss this further in a subsequent blog post.
If we examine the cycles lasting from several quarters to several years, we find it probable that the positive cycle that began in March 2009 will eventually move to higher levels before its conclusion in 2010 or beyond.
When we come down to the intermediate term, in which market moves unfold over many weeks to a few quarters, we are well overdue for the first meaningful correction to the move that began in March. While momentum has remained positive, its pace of growth has weakened markedly, often a precursor to a reversal of direction. Although market averages are at or near rally highs, a decreasing number of individual stocks are supporting the move. Such a decline in breadth, while not immediately fatal, is often a warning that the move is nearing its end. Further concern arises because the market’s volume has steadily decreased since April as prices have continued to rise. There is an old investor’s axiom that volume confirms price action. When volume is absent, price moves become increasingly suspect. Another factor that could soon start working against stock prices is the sharp rise in longer-term interest rates evident throughout the month of December.
Over the very shortest term, covering periods ranging from a few days to a few weeks, the picture is particularly cloudy. The upward move in prices through December has raised most short-term market measures into overbought territory, leaving stocks vulnerable to an imminent correction. On the other hand, with most managers heavily laden with stocks, large interests are motivated to do what they can to give stocks a positive start to the new year. Many market analysts view the market’s early behavior as a good forecaster of the entire year. Of considerable concern in the short term is the almost unanimous belief that there is no immediate danger to stock prices. This week, for example, the Investors Intelligence Advisors’ Survey shows the smallest percentage of bears in almost 23 years. Such surveys often prove to be excellent contra-indicators of market direction when they display extreme readings of optimism or pessimism.
With so many cross currents, we strongly urge investors to remain flexible and prepared to adjust portfolios rapidly if conditions warrant. The economy and the markets were in danger of collapse just nine months ago. Government and central bank actions around the world have pulled us back from the brink of the abyss. It remains an open question as to whether the cure is lasting or whether the financial system and the equity markets are merely in the eye of the hurricane.
Whatever transpires in the year ahead, we wish all of our readers a year of peace, good health and the enjoyment of life with family and friends.
Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to Tom@missiontrust.com or call (520) 529-2900 to speak with one of the Portfolio Coordinators.