Why did the market rally last week?
All our indicators are telling us we are in a bear market. Just because we are in a bear market doesn’t mean we are in a recession. In fact, during a bear market you can see some huge upsurging. This is usually caused by what is known as “short covering” from investors who sell short. Investors borrow stocks and sell them. When the stocks they sold do not drop later so they can repurchase them at a profit, short sellers are forced to buy them back at a higher price putting more money into the markets. This is why we saw the market rally last week. Anytime you see stocks move really quickly without a fundamental reason, it is typically caused by short covering. This happened last week when we saw oil move 20%. Today oil is back down again.
Why not just sell everything?
Some of our clients have been asking why we don’t just sell everything if we are in a bear market. From an asset allocation point of view, we have some bond positions that look attractive and could do very well. Also, one never knows when the bear market is going to end. This is very important to consider when looking at your asset allocation and how to react to this bear market.
We are not in a recession
There are times when a bear market will take the economy into a recession, but this is not one of those times. Every recession since WWII has had three components:
- A drop in industrial production
- A drop in corporate profits
- A 1% drop in the employment rate
The bottom line is employment is growing. Also, if you extract the energy dynamic that is going on, S&P 500 corporate profits are good. The popular press is talking about a recession more and more. We disagree and can see that we are just not in one.
A new kind of economic war
Saudi Arabia has made it clear that they are going to keep knocking down oil prices until they bankrupt US frackers. Over the weekend they said they are not going to decrease production and they are also investing in more infrastructure to increase oil production. This is a whole new kind of economic war.[bctt tweet=”Saudi Arabia has made it clear that they are going to keep knocking down oil prices until they bankrupt US frackers.”]
News media causing volatility
Saudi Arabia is not just trying to bankrupt US frackers. They are causing pain in other countries as well like Russia, Venezuela, and Brazil. Some of these countries aren’t just in a recession, they are in a depression. There is speculation that Russia could initiate some kind of war or conflict in the mid-east just to cause the price of oil to jump up. When this kind of speculation information hits the news it can cause all kinds of volatility in the markets.
Artificial growth in the markets
One of the reasons we saw the markets go up last week was because of a lot of generosity in Europe, Japan, and other countries. Central banks in these countries announced there will possibly be more quantitative easing. This announcement caused artificial growth in the markets.
Another wild week
We have another wild week in the markets ahead with a lot of data that could impact the markets. Several big technology companies are reporting earnings tomorrow. Wednesday will bring another Fed meeting. It will be interesting to see what they say about Mario Draghi’s statement last week that there are no limits on what the European Central Bank will do to keep their economy going. On Thursday we will see the jobless claims and durable goods numbers. The GDP number will come out Friday and it is expected to come in 1 1/2% – 2% lower than the middle of last year.
A healthy market indicator
We will be watching how the market responds to the GDP number. If GDP comes in negative and the market responds positively, that means the markets are expecting the Fed to come in and save the day. That will prove that quantitative easing is driving the markets and that the market is not healthy. If GDP comes in low and the market goes down, in the long run that is a good thing as it shows the market is not expecting the Fed to come in. This could lead us to a normal functioning economy.
Don’t trust the market rally last week
The market rally last week caused many investors to get their hopes up that the Fed might respond by turning more dovish. We believe this false hope was another cause of the market rally. We do not think the Fed will change its position. This is why we do not trust the market rally last week. The Fed cannot continue to medicate the economy. The market has to stand on its own. We believe we are seeing a repricing of the markets because we are coming off the medication of quantitative easing. We need corporate America as well as leadership in this country to come together and let the economy take care of itself. We no longer need medication from the government.
How to react to these markets
In a bear market it is all about capital preservation. There is a time to move to cash and a time to move out. There are many moving parts to consider. We are watch all these factors we have discussed here and more to help us react to these markets in the best interest of our clients. We will keep you updated.
Please keep sending us your comments and questions.
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Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
Stock investing involves risk including potential loss of principal.