Where the hell is the stock market going?
For all of 2015, the S&P 500 has done nothin' but bounce around 2100. Sometimes a little, sometimes a lot. There are a lot of theories as to why:
- The markets are unsure about the future!
- The markets are awaiting a rate hike!
- China!
So, maybe all of those are true, to a degree. Without full on stimulus (beyond ZIRP) from the Fed, stocks don't march higher. Plain and simple, the stock market has been ushered into an artificial bull market by the Fed's asset purchase programs and their promise to back-stop whatever downturn may come in the markets. Analysts have only been searching the garbage (economic data) to attempt and rationalize/justify that the bull market since 2009 has been a result of economic growth and not Fed stimulus, at least not entirely.
There are a couple of problems with that notion. First, the bottom three quintiles of income earners in America have been in stagnation really since 2007, and you could argue for far longer. Second, what economic growth? Third, corporations are not reinvesting in their companies.
All corporations are doing now are buying back stock, buying other companies, or increasing dividends, all in order to appease the shareholders. Major corporations outside of media have done little in the way of broad based expansion that has been seen in almost all other expansionary times in recent economic history.
Back to the stock market in 2015. We've basically gone nowhere for 10 months, something that has not happened in many years. Bulls will say that it's a "breather," and that after two years and a 45% gain its only natural to take a break. Fair enough, I suppose, but the market doesn't make moves ... investors do. The dog wags the tail.
Investors are afraid of a tightening Fed. Now, everyone knows my thoughts on the Fed's supposed oncoming tightening cycle. Ain't gonna happen. But not everyone is as skeptical as me and believe the shit coming from Yellen's mouth.
If I am proved wrong, I would worry for investors. The stock market has not "survived" a tightening cycle hardly ever.
In 1994 the Fed raised the FFR from 3% to 6%, and the S&P 500 didn't budge the whole year. Hardly a collapse in stock prices, but the economy was also moving along speedily, and it was a result of "real" growth. In the summer of 1998 the S&P fell from 1180 to 980 and the Fed responded by cutting the rate from 5.5% to 4.5%. The market took off as a result ... this was when the "Greenspan put" was coined. From June 1999 to June 2000 the rate was raised from 4.75% to 6.5%, the NASDAQ collapsed and stocks entered the bear market of 2001-2003. The Fed responded by cutting rates from 6.5% to 1% from 2000 to 2003. Starting in 2003, not coincidentally, the market took off.
The Fed then engaged in raising rates from 1% to 5% from summer 2004 to summer 2006. Guess when the housing bubble popped. Yes, that's right, late summer 2006. Stocks lost half their value in the coming years despite the Fed renege of cutting rates to 0%.
In other words, a Fed tightening cycle would spell disaster for the market. If cutting rates from 5% to 0% - ZERO PERCENT - did nothing to save the imploding market, what the hell can? Surely not a cut from 2% back to 0%, because that's probably about how high the Fed's gonna be able to get. The Fed has no firepower left to stem a market sell-off. Even another round of QE won't do the trick, because that will probably scare the hell out of investors since the accepted narrative is "all clear for raising rates, the economy is doing pretty good now."
If China gets worse, which it more than likely will, I smell trouble for US stocks in 2016 and 2017. It took about a year and a half for stocks to catch on to the fact that the credit boom of 03-06 was collapsing, hence their delayed sell-off until 2008. China's crumbling is the catalyst this time, it looks like.
The bull market of 2009-2014 is over.
