Written by Keith Springer| 4.4.13
Recent nuclear threats from North Korea have done what nothing else has been able to do…take stocks down, even if only for a small dip. Whether the threats continue to affect the markets, is up in the air. What we do have going for us is that April is the best month for the Dow, and the second best for the S&P 500 since 1950. This creates an interesting little battle. Political rhetoric from a mental midget vs. the cyclical forces of the financial markets. I say, bring it on baby.
Despite intense public cynicism, the first quarter of this year was the best in 15 years. This is clearly a case of the market climbing a wall of worry, for as I’ve always said, “the market doesn’t crash when everyone expects it to.” More often than not, strength begets. Regardless of what group I speak to, the overwhelming majority is calling for a correction. Some because they truly believe that the bottom just has to fall out of this market very soon, and some simply hoping for a correction so they can buy in at lower prices.
Even though we are overdue for a correction, I wouldn’t be surprised to see it leave many in the dust on the sidelines. Even though a shallow pullback of 3-5% would be welcome, it would be short-lived, as waiting investors would likely seize the opportunity. Not until the majority of investors capitulate and rush to get in, will this market take a substantial hit (most likely this summer).
According to this week’s AAII investors sentiment survey, over 62% are neutral or bearish, with only 38% bullish. This is astounding when you consider the market is at new highs. Usually at this point we are concerned that there is too much bullishness, but not this time. A reading of over 50% bulls for several weeks will be a cause of concern.
Of course our nations rapidly changing demographics is not going away anytime soon. 80 million baby boomers cannot be replaced in the economy by 65 million Gen-xers. It will be several more years before the echo-boomers, the kids of the boomers who are 90 million strong, will have a meaningful impact on the economy, and at that point the good times will roll again. Until that time, the Federal Reserve will have to remain active.
What concerns Bernanke is that past economic recoveries have been much stronger. Following the crash in 1929, GDP fell a staggering 28% over the following 3 years. Finally, 5 years later it came back to life, bouncing back by 8% in 1934, 8% in 1935 , and over 10% in 1936. This carried the market with it as the stock market recovered over two-thirds of its losses. Compare that to a feeble 2% today.
Of course, a lot of this has to do with an aging population cycle similar to what we had in the 1920’s, as I discuss in Facing Goliath-How To Triumph In The Dangerous Market Ahead. However, much has to do with the fact that we were a net creditor nation back then, and today we have a huge deficit that is still growing. When money needs to go toward paying the interest on debt, it can’t be invested for growth.
In 1937, the coast seemed clear for the economy and there was a rush to end the stimulus. This turned out to be severely premature, sending the country into a tailspin and into the second leg of the Great Depression. Stocks fell once again by more than half. That didn’t end until 1942 when we ramped up for WWII, while investors still would not break even for another 25 years in 1954.
Of course tactical investors prospered significantly better while buy-and-hold got slaughtered. What Bernanke is trying to avoid is turning 2014 into a replay of 1937. This seems nothing more than an ounce of pleasure today for a pound of pain tomorrow. I worry for our children and our retirement!
Regardless of whether you are in the bulls camp or the bear’s, you must have your money far away from low rate savings accounts and working for you. The key is to be properly invested in a portfolio that is designed to get the best returns with the least risk possible, as our investment approach is built to do by managing risk and delivering returns in any market.
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