"The market correlates to the direction of earnings (which are expanding... as Jeff Saut..... #3 in my top ten)
this leg of the secular bull market is being driven by organic earnings growth.
"we need the earnings to go south and that only happens in a recession or when the yield curve inversts
and we are a couple of years or at least 18 months from that happening."
We could have a peak and a correction, but You don't Have THE PEAK in Earnings (and in Prices) for another 18 months or more when.... The yield curve inverts and Credit shuts down.... right now we are
so far away from that happening.....
At the same time, many investors fret that the so-called passive revolution that has fed the growth of Vanguard and rivals such as BlackRock Inc. is itself creating a series of structures that haven’t been tested and could be vulnerable to unpredictable behavior in a downturn.
“I don’t think that there’s much that changes these flows until we have a negative market,” said Daniel Wiener, editor of the Independent Adviser for Vanguard Investors, an independent newsletter that follows Vanguard funds. “I can’t tell you when that happens, but when it does there will be a lot of very surprised investors,” he added.
Mr. McNabb acknowledged that a sharp downturn would “certainly” cause investors to dial back their investments in the stock market. Such a move could at least slow down the surge of money into passive investments.
He added, today, “you’re still seeing the highest level of flows into riskier assets than at any time in my career.”
From 1854-1919, the average expansion lasted a little over 2 years. This increased to almost 3 years from 1919-1945.
By comparison, recent decades have seen a golden age for uninterrupted growth. The last four U.S. expansions have averaged 8 years in duration.
As a result, the likelihood of seeing a recession at any point in time has fallen dramatically.
Back in late 2012, when the U.S. expansion passed its average duration (39 months), there were a number of recession calls from prominent analysts.
Five years later many are still predicting recession, using the logic that we are “overdue.” These analysts remain correct in saying that the expansion is longer than average, but profiting from such an observation (by shorting the stock market) has proven to be a difficult task.
Similar to overvaluation, this is not inconsistent with the historical record. An economic expansion that is longer than average is not a reason (by itself) to expect a decline in stocks. More often than not, stocks continue higher.
Recession still looks to be far away, at least in the US. That is not to say that stocks should continue their parabolic moves. Many questions come to mind. Is there critical data that is out there and "obvious" but no one wants to "see at this time"? Looking at the recession chart data shows that many younger people in the market have had less experience with investing at the turn of the economic cycle.
Calls for crashes and massive overvaluation appear misplaced at this time, IMO. A long overdue correction phase may be closer than the many believe simply because many don't believe it's near. We have not seen how the current market trading will adapt to a multi-day down stretch. We know how fast the buyers appear in a day or 2 of down but will those same buyers have the confidence to continue putting money into the market after a few days of trouble?
No reason to get panicky or excessively nervous, IMO. But there are reasons to be a bit more careful after a run like we've had since 2009. M2 growth slowing, combined with the "tapering" of the FED while they start to unwind QE is an interesting combination. The first "taper tantrum" caused a quick reversal of the FED's stated intention. Let's see not only how the market handles the next few quarters but just how the central banks work toward the stated goals of "a more normalized monetary policy".
Talk is cheap....action speaks louder than words! |
