We know more, yet we still know nothing! Jobs, OPEC, China, Draghi giving away more free money to the EU for at least another year and a half, a crazy low American ISM, and a pending FED hike.
We talk about it all the time. The market hates surprises, and we have more facts today than we did yesterday, and the day before that, and the day before that. If we know more, then why are the markets still not acting “rationally?” The problem is that facts paint a picture that has never been seen. Uncharted territory is nothing to new markets, and the argument could be made that uncharted territory is the “norm” for markets; however, from an academic point of view, the facts are puzzling.
The American economy is close to full employment, the dollar is up, commodities are cheap, and inflation is low, which should signal the consumer is strong, and we should expect robust Christmas spending and a nice Santa Clause Rally….Right?
American corporate investment and earnings are down. With 98% of the S&P reporting Q3 earnings, earnings for the S&P 500 are down $8.21 per share this year, while Russell earnings are off $4.79 per share. The last 3 times this metric fell that far into negative territory on the S&P 500 were Q1 1990, Q1 2001, and Q4 2007, coinciding with the start of each of the last three high yield default cycles. About the only thing that corporations seem to be doing is buying back shares, growing through acquisition, and looking for clever ways to avoid American taxation.
Developing markets, China, Japan, OPEC nations, Russia, and all of Europe (the weak EU members are pulling down the stronger members) are running on debt and stimulus. We have pointed out more times than we care to recall that there are countries with many multiples of GDP in debt and no real way to pull out of the tail spin to bring it in check through spending, manufacturing, developing new technologies, or most importantly, population growth.
It is easy to be bearish, but that is just foolish and unrealistic, while Central Banks are flooding the market with money. While the rest of the world stimulates, the FED looks for ways to cool bubble building. Yellen and other high profile FED members have been going on the road circuit to give a dog and pony show to make sure it is crystal clear to the market that rates will be hiked. Even if the FED would raise rates by 50 points, money would still be dirt cheap! Again, we ask the question; what are normalized rates? Is this the new world; are we living in the long run or the short run?
As a trader, a business owner, an investor, or an average “Joe”, what should we do? We have hard economic data and a clearer picture than we have had in years on what is coming down the pike from the FED, but what should we do? Should we buy a new house, hire more employees, buy a new car, invest in new machinery, or hide our money under a mattress? These are the real questions, and even with more facts, there is still uncertainty, and what do we say? The market hates uncertainty.
We have facts, yet we have questions and lots of them. What is next? At this point, it is clear that history tells us things won’t end well, but what history does not tell us is if the current sorcery from Central Banks can change what the facts tell us. Just more uncertainty.