An Overview of the Markets
Investors today feel that they have been burnt as their stock portfolios have performed poorly. Each day they are bombarded with negative news from Syria where fighting continues, from Europe where the ever increasing debt crisis never seems to reach resolution, from Japan where debt levels continue to rise as the population continues to age, from the USA where unemployment remains stubbornly high and where there is fear of the future, from China where there seems to be an increasing slowdown, and the negativity emanates from every news source.
The Daily Swings in the Stock Market
The stock market seems range bound without a clear direction. One day, reports of disappointing house sales in the US sends the markets down. The next day an interpretation of the latest remark by a Fed Member leads some commentator or another to surmise that a new round of Quantitative Easing will be forthcoming, which sends the markets higher. It seems that almost each day, there is an anticipation of some news or event that will signal either a dramatic fall and a worldwide depression, or the end of the downturn and the start of a massive upturn. Yet the markets seems to fall back to the mean after the latest rise or fall.
Taking a Broader View
What is needed is for investors to take a broader view of the world.
The Major Stock Market Indexes
In October 2008 and again in March 2009, there were dramatic falls in the stock markets, and investors fled the markets fearing that all value was dissipating. In order to have a proper overview, let’s start with the indexes and see what has happening over the last 4 years.
The Dow Jones Industrial Average
The Dow Jones Industrial Average hit a low of about 7,000 in 2009. Since then, it has relentlessly risen, albeit with significant dips along the way. If you plotted the DJIA on a chart, it is in a upward channel that is continuing. Today it stands over 13,000, which is almost double its low of 4 years ago. It is above the 10 day MA (Moving Average on a yearly basis), above the 50 day MA and above the 200 day MA. Ignoring the daily news headlines and only looking at the long range trend, the Dow Jones averages have been on a positive path for 4 years now.
The Dow Jones Composite Index (DJCI) shows a similar movement through a clear upward channel. The 2009 low was around 2,400. The current is above 4,400, again almost double that low.
The Current Stability
It is often repeated that the stock market foretells the future. As China and other economies rose to prominence, the price of precious metals rose dramatically, as did the price of base metals, and other commodities. After such a rapid rise, one would expect the downward slide would be similar. But this has not happened.
Gold peaked in the $1,900 range in 2011, and then fell to $1,600 where it has stabilized. It has been range bound around $1,600 for some time. It has not fallen back to $300, where it started its rise, nor to $1,200 where many pundits prophesied.
Silver had a similar stellar rise to almost $45, but has weakened to the high $20′s and stabilized. Copper had a similar fall and then rise, but has stabilized above $3.00. Similar results can be seen for energy prices. The stability of commodity, metal and energy prices at levels far higher then historical norms bodes very well for the future.
Recent Volatility in the Stock Market
As the market reacted to strong negative or positive news over the last year, stocks either rose or fell dramatically, but then bounced back to the current levels. But as the summer progresses, and the news never changes, investors are calming and not reacting quite so dramatically. Volumes of stock trading have continued to moderate and more and more money is being parking in the Money Market at near zero interest rates.
The Stability of the World
The clear interpretation of this is that there is worry in the investment world, but that demand for commodities, metals, and goods and services remains constant. There has been no great crash, and the market is telling us that there will not be a great crash.
What to Expect
The debts in Europe are impossible to deal with. Germany does not have sufficient resources and strength to bail out everyone without being hurt badly itself. Either a common Eurobond is created that mandates closer economic controls over all countries, or the weaker countries will sink further into the mire. Either way, there is no escape from economic reality. The advantages of this great economic experiment have been overshadowed by the excesses of benefits given by governments to its citizens. Europe is too big an economic block to fail, so it will muddle along. In due course, reality will force a moderation in spending and slow economic growth and inflation (hopefully mild) will gradually diminish the debt and the abuses. But the point is that Europe will not disappear and goods and services will remain in demand.
China will also face its weakening as its great economic boom which was fueled by world demand for cheap goods and services abates, due to higher costs and weakening demand.
Japan will continue its path towards economic uncertainty because of the aging population and increasing debt.
The USA will not have a government that destroys economic activity through a dramatic recreation of the scenario that caused the great depression – dramatic and abrupt debt reduction. Political rhetoric will give way to economic reality as it always does.
The Bottom Line
We are in the bottom of the current cycle, and the next economic cycle is starting. The stock market is telling us so. The enormously increased numbers of middle class consuming people around the world are demanding more goods and services. The old abuses are slowly being wrung out the system, and patience is warranted while the world changes yet again – as it always does.
We may or may not have positions in the securities we name. In making an investment decision numerous factors must be considered including portfolio balancing, timing, cash and capital reserves, asset allocation and other factors. Readers are strongly advised to do their own research. Matters discussed contain forward-looking statements that are subject to risks and uncertainties and actual results may differ materially from any future results, performance or achievements expressed or implied.
Views expressed are opinions and not investment advice. Persons investing should retain a licensed professional to guide them and not rely on the opinions expressed herein. This report is neither a solicitation nor a recommendation to buy or sell securities. We are not a registered investment advisor nor a broker-dealer. The information contained herein is based on sources which we believe reliable but is not guaranteed as being accurate or a complete statement or summary of the available data.