Weekly market commentary
Friday, May 16, 2014
8:10 AM
One of the oldest Wall St proverbs "the market climbs a wall of worry" seems to be more true recently than usual. We are seeing some sharp moves as the sentiment switches from fear of being in the market to fear of not being in the market. Seems like typical price action as we move from raging bull market to flat market with a bearish bias. The sector with most perceived risk have already taken a hit - bio-tech, new issue tech, small cap. While the large cap indexes are just off fresh all time highs. What is happening underneath the surface…
Bond yields are trending lower over the past several weeks. There seems to be an endless list of issues which push people to the safety of developed worlds sovereign debt. We focused on Syria situation for quite a while - buy US Treasuries on that. Then we move to potential US default and downgrade of it's coveted debt - heck, buy US Treasuries on that as well (really???...really!!!). Ukraine situation gave us some fresh fodder for guess what? - correct!!! Buy US Treasuries. All the while the market climbed that wall of worry and why not, corporate America has been doing great. Earnings have risen steadily , debt is cheap - thanks to Federal Reserve. The Fed has been involved in the market for the past several years keeping rates low by doing what? Buying US Treasuries. Let's give that a name, something that sounds really complicated - Quantitative Easing. It's been a fun ride but it really may be coming to an end.
We are starting to see a slowing of global growth, China being the most worrisome recently, but across emerging economies. Ukraine situation and the economic sanctions on Russia will definitely crimp growth there, but Europe may pay a high price for this as they are much larger trading partners than US. EU needs to move aggressively to ward off slowing growth and potential deflationary spiral. The market expects the EU to take further easing measures in June.
Here in US the real estate market seems to be running out of steam which is the biggest driver of growth in the economy. The Fed has been backing off the Quant Easing stance - has gone from purchasing $85 billion in a mix of debt each month to $45 billion, and this program should be finished by the end of 2014. As this is happening, we are seeing inflation indicators slowly tick up, nothing to panic about but as that ticks higher, the Fed has less room to act. So our cheap debt scenario may be going away soon. Labor numbers look good on the surface but the participation rate is not. People are dropping out of the employment pool, this is troubling statistic which has haunted the Fed for several years
Bearish yet. You'll get there, keep thinking about it. Wall St does climb the wall of worry, but sometimes the wall just gets a little too steep. Let's call it a stock pickers market. I am not declaring doomsday, but maybe a little hedging would be a good idea. This is no fun, next blog will be about what's happening in the garden. Good luck
