It Seems Like The Intensity of Interest In The Bottom
is indicative of an assumption which may not be true.
When thinking about a bottom it seems that it is also important to think about what happens after the bottom.
The most important question would be:
After the bottom at what rate is it reasonable to expect stock prices to increase?
It seems pretty clear to me that stock prices can not increase more than the rate at which the economy is growing. Faster than that the price of the stock becomes dependent on others expectations of future stock price rather than the wealth that the equity you have purchased is actually going to produce. When that happens you ultimately end up where we were in April. But the same limits which precluded the April highs from continuing, and the markets attempt to regain those highs in August will continue to exert themselves until the market is willing to accept a realistic growth rate.
I realize that some people think the end of the growth in April was precipitated by the actions of the Federal Reserve. I don't think it is necessary to resolve to what extent that was or wasn't the case. I think that any reasonable person has to acknowledge that to the extent that the market is growing significantly faster than the economy is growing that at some point the "wealth" that the market is producing will exceed the real economic "wealth" (stuff) and at that point either stock prices will stop increasing or the price of real "wealth" will be bid up, which will mean inflation. The extent to which this limit was actually reached in April, and the extent to which the subsequent market corrections were the result of intervention by the Federal Reserve does not change the fact that there is a limit on the extent of this divergence. Given the amount of divergence between the rate of increase of the market and the rate of growth in real things,(for sake of argument 5% vs 50% or about an order of magnitude, we were closing on the absolute limit fast.)
To avoid a lot of detailed issues associated with including an appropriate risk premium and other reasonable responses I'd be willing to say that it is not reasonable to expect a carefully selected, reasonably diversified portfolio to grow faster than twice the rate at which the economy is growing.
So if our economy is growing at 4% a year it may be reasonable to assume 8%.
Before anyone attempts to negate this fact with an examination of actual returns in the last 8 - 10 years I would urge you to review the data for a much greater period of time (like 100 years).
Furthermore, it may be the case that, as many have speculated that the Federal Reserve will intervene to prevent prices from falling the level that the absolute size of our current economy might truly call fall, and may intervene to allow prices to stabilize at some artificially high rate, and then allow profits to grow into the prices.
If this is the case it means that stock prices will in fact not grow at the rate of the economy until this price/earning deficit has been paid off. Obviously an unchanging stock market doesn't work so it could be expected that a portion of the real growth would be allowed to find its way into stock prices and a portion will be used to amortize the P/E deficit.
The implication is that after THE bottom is in, depending on how low it is, it is unlikely that stock prices will begin to rise any faster than the rate of real growth in the economy, and more than likely that they will increase at a lower rate.
If one accepts this premise, as well as the idea that if the market does decline it can decline much more rapidly than it is likely to grow, the idea of investing in the market until a sustainable bottom has been clearly established (which given that many claimed the bottom was in last May, and here we are again will probably require more than a few months) seems to have very little upside and a lot of downside.
Another argument that I have heard about entering the market early is the ability to advantage from the initial upside of a bounce from the real bottom. The problem is that any bottom we bounce off of is not the real bottom. Nor will we have a bottom until every investor realizes that this is the case, or those that don't run out of money.
Now none of this has anything to do with very short term trading since I would expect that within the overall trend there are much smaller waives that seem to provide the opportunity for gain. Since I still cling to this idea I'll refrain from arguing why it isn't really true either. <gg> |
