In terms of the overall market, we have seen erosion in the Advance Decline line for 18 months, so we are well into a bear market. What has held the averages up though has been the rush to large cap stocks. The reasons are many including primarily liquidity and increased market participation by Main Street USA. Thus, it is not surprising that the current valuations remain as high as they do. But at some time, we will see some sort of recession--most likely in the next year, and then we will see the large cap stocks take a hit as well, which will tell the rest of the world what is already quite obvious--that we are already in a bear market. The degree to which the bear market occurs will depend upon how much "House Money" is left on the table. In other words, the correction could be 15% or 30% from the highs, but probably not in between. My point is that people will let their money ride if they are still holding a profit long-term. But if the market starts cutting into their initial grubstake, then there will be a much greater sell off.
What bodes poorly for the future? China is effectively in a recession. Japan has just begun to address the structural problems in its economy, but so much of these problems are long-term cultural, so it will take much longer to ameliorate. The US economy is strong, but it still has had the longest up period in history, and the current market valuations are fully priced as to this continuing for the next two years-an unlikely scenario. What does that leave? Europe. At best, not enough.
Furthermore, obsession with interest rates is always a good indication of the later stages of a bull market as is a move to commodities. There is a reason that Mr. Buffet is in cash. |
