Yesterday’s powerful rise in the stock market offers an easy target for rationalizing that the five-month-old correction in equities is over. Perhaps, but your editor is suspicious.
Yes, there’s no getting around the fact that yesterday’s 3.7% jump in the S&P 500 is one of the better daily gains on record. But the human mind is too easily influenced by the most recent events while minimizing older trends. For our money, the older trends are still in force, which is to say that all the obvious threats to a sunny outlook for stock prices still apply: Higher energy prices, continuing fallout from real estate, the accumulating evidence of an economic slowdown or worse, and so on. All of these items, and more, threaten to weigh on the stock market in the weeks and months ahead. One more Fed decision intent on liquefying the otherwise gummed-up credit market doesn’t materially change much for this writer’s intermediate term outlook.
Yes, the Fed’s accumulating actions will eventually be a contributing factor that turns the strategic sentiment to positive. But the idea that this moment arrived yesterday afternoon looks slightly premature.
That’s only a guess, of course, and so the new bull market may be underway as we write. The S&P 500 was off roughly 15% as of yesterday’s intraday low from the all-time high set last October. That’s hardly trivial. But considering the context of the last several months, one can reason that the selling is driven by the fundamental deterioration in general economic conditions. If so, the central question is whether those deteriorating conditions have ended or are about to end in the near future? On both counts, our forecast is “no.”
Again, we have no way of knowing for sure and so one shouldn’t fully discount the possibility that the stock market’s headed for higher ground. In fact, there’s an inherent danger in assuming that economic cycles and stock market cycles align in real time. In fact, they very definitely do not. That’s an important caveat to keep in mind in the months ahead. The risk of being early or late is forever present in timing the bottom, which convinces us to diversify strategic and tactical bets over time as a tool for grabbing the opportunities that corrections inevitably offer while keeping risk at bay.