Equity Declines No Longer Permitted in the U.S.

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Of the 18 major world equity markets that I follow on a daily basis, ten are down for the year, three are virtually unchanged and five are up.  Of the five that have provided a positive return, four have fallen sharply from their May highs.  Only the U.S. remains largely unscathed, not far below its all-time high.

Broad price declines have been experienced throughout the world despite a growing number of central banks adding equities to their balance sheets.  So far our Federal Reserve has not volunteered that it has actively intervened in the equity market, although it has acknowledged pushing prices up to be an integral part of its wealth creation program.

What is apparent is that some force has played an important role in manipulating the U.S. market.  Whether it’s the Plunge Protection Team, other central banks operating at the behest of the Fed, major investment banks or high frequency traders, the effects are clear.  Prices have bounced repeatedly from levels that over the long history of markets have signaled breakdowns from which further price declines typically flowed.  Not so any more.  Over the past six months the S&P 500 has suffered not even a single 5% decline.  Until this week, the Dow had not experienced three consecutive down days since last fall.  All this with the majority of world markets in decline.  Remarkable!

Even the popular press has noted unusual trading patterns.  Thursday’s USA Today highlighted the phenomenon of the Dow experiencing intraday price swings of 100 points or more in 15 of the past 16 trading sessions.  Thursday’s 249 point swing from low to high made it 16 out of 17.  Regardless of who is providing support against breakdowns, the Fed has promoted a highly non-traditional market environment.

Investors have historically been advised to be long-term in their thinking and investment practices.  In an environment no longer governed by traditional valuations or market practices, long-term investing runs the risk of suffering severe consequences should central bankers’ dangerous, unorthodox approaches ultimately prove flawed.  In an abnormal environment, we continue to advise a strategic, flexible approach to equity ownership rather than the more traditional buy and hold.