The End of The Great Viagra Market
So far, 2015 has been a dud for investors. The market has been trading in the narrowest range in decades, insipidly bouncing between plus or minus one or two percent depending on the day. At the moment, stocks are down for the year.
The lackluster market action has been both surprising and frustrating to investors. A recent poll showed an overwhelming majority believe that stocks are up 4% or greater for the first half of the year.
The current bipolar market can thank a number of dramatic changes in the financial markets this year: the collapse of oil prices, European QE which strengthened the US Dollar, and most importantly the goodbye to the zero interest rate game on which all became addicted to over the last eight years. Bonds are now hyper sensitive to any and all news of a stronger American economy, which would cause Janet Yellen and the Federal Reserve to start hiking rates. Of course any rise in rates would only signal good news for the economy, but that is no consolation to a world addicted to free money.
I originally wrote about this phenomenon in my November 11, 2010 newsletter entitled – The Great Viagra Market, where I stated:
“Right now though, everything is just rosy (or should I say baby blue), because we are in the Great Viagra Market. The cheap money that the Fed thrusts in will have the same effect as Viagra. Keep pumping it into the patient, and he’ll continue to smile (if there is enough blood to go around). Stop the cheap money flowing, and the economy will limp along at best. However, there is a cost, a great cost, in both dollars and heath. These pills are expensive and there’s only so much room on the credit card. Of course it all depends on how long your heart can hold out.”
We seem to be back the “good news is bad news and bad news is good news” market thinking. Institutional traders and investors are mixing their Zoloft with their Adderall in an attempt to combat their manic depressive mood, expecting the economy to plunge into recession one day, and then discounting a recovery the next.
The next few weeks are not going to get any help either, as we are now in the Earnings Nap period, where companies are in their blackout period. That is the time right before earnings where they cannot talk about their stocks. Without any good news to focus on, investors pay closer attention to the news headlines, and we know what kind of mood that puts you in.
The world will be watching the Fed to see if they raise rates. If they do so prematurely, investors had better be prepared for there will be a hell to pay!