In my March 16th Market Update ‘ How Do I Invest Now’ I wrote; “I believe we are in store for an even more volatile year in 2015 than we saw the past two years. Look for more conflicting data and opinions which can lead to polarizing opinions by analysts and confusion by advisors and clients alike. I think you will see market pundits and investors swing from strong optimism to strong pessimism (euphoria and panic) with regard to the markets.” Thus far this is certainly playing out before us. The violent market swings and media talking points just in the last 5 weeks have been exactly this. So where do I see markets going for the rest of the year?
You know some people don’t like to watch re-runs of shows or movies while others do. Me, I can watch a movie or show I like over and over. Heck I’ve probably seen the John Wayne movie ‘The Quiet Man’ over a 100 times (let’s not even try to count Rocky III). Even though I know what scenes are coming up I still enjoy the moment of the movie like it was the first time I saw it. This is how I see the markets right now. This year seems to me to be a re-run of the second half of 2011 and 2013 for many reasons – no this isn’t a new “odd year investment theory” though I’m sure someone is saying such. In 2011 the major US stock markets suffered decline of over 19% peak to trough – just a hair short of the generally accepted 20% = a bear market theorem – due to concerns of European sovereign debt contagion. Cue pop up of China credit collapse now. In 2013 the markets sold off sharply due to the ‘taper tantrum’ and then later over fears of a US government shut down due to Congressional bickering… sound familiar? I cannot recall a time in the last 25 years when so much angst was made over a 0.25% change and we’re just starting to hear about worries of a possible Congressional forced shutdown of the US government again. I’m sure the fires of fear will be stoked much more in the coming weeks.
In my July 1st Market Update ‘Monsters, Markets and Mishaps Oh My’ I wrote: “I believe the markets have made a serious misstep and have over-reacted to a potential US Fed pull-back from its bond buying ways which causes me to think that US Treasuries could be set for a quick turnaround (yields down and prices up). Additionally, the data available does not show me that the global economy is all rosy and the debt problems of the European Union (EU), Japan and/or the US are on the mend, let alone China (whole other story) so I don’t see this as a time to take on an “anchors aweigh” mentality towards taking risk.” Don’t get me wrong I wasn’t completely correct, in hindsight it was actually a good time to take on a lot more risk exposure through growth stocks in the markets after that – hindsight being 20/20 and all that. Like the taper tantrum I think people are over reacting to the Fed’s comments. I’ve stated since 2010 that I don’t see the Fed raising rates until 2016 and continue to believe so. I won’t take up this Update rehashing the reasons which I’ve discussed repeatedly.
Currently there is doom and gloom headlines everywhere and no shortage of “analysts” (sense the sarcasm with the quotation marks) calling for Armageddon in the markets. Yet in my 25 year career as a financial advisor thus far I have not seen nor read of a US market collapse when the majority of market pundits are predicting it. Also I have yet to see a US recession, let alone economic collapse, when the housing sector is growing see Bloomberg Business article ‘US economy Just Starting to Tap Into a big Source of Dry Powder’that I shared on LinkedIn recently. Ah, but what about margin debt near all-time highs that I keep reading about. Yes this is something to watch but the reversal of the trend is much more important indicator also not margin debt alone but margin debt vs available credit balance (available cash and credit). Plus margin debt does not always mean buying long positions on credit thus gambling it will go higher so that any significant drop in margin debt could mean a sever market drop as the pundits are putting forth. Short selling is done on margin too and surprise, we are at the highest levels of short positions since March of 2009. You may remember that the US stock markets bottomed from the 2008 financial crisis in March 2009. I don’t think we’ll see a rally like we did after march 2009 but I certainly think it’s as unlikely we’ll see a major market meltdown when short positions are at highs. (Selling short is where you borrow stock today to sell with the hopes of buying it back later at a lower rice and keep the difference from where you borrowed the shares minus margin interest for the time you were short the shares. Yes, selling short is a very risky bet.
So back to the question of where do I see markets heading the rest of the year… I believe the markets will retest their lows hit on Aug 24th and possibly go lower setting up a year-end rally that carries into the new year. So I’m holding onto cash I’ve got and looking for ways to prune my portfolio. In a broad market selloff quality names drop along with more speculative names so I look to upgrade the quality of my portfolio holdings from a broad market selloff. Use fear in the markets to your advantage.