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Hey, Just Keep Buying, What Could Go Wrong?
We all remember the fable of Chicken Little running around screaming, “The sky is falling, the sky is falling”… We also remember the ridicule she received for jumping to conclusions…
But, what if she were right? What if the sky really was falling? Would she have been considered a hero?”
That’s a question on a lot of traders’ minds these days… and it has to do with the possibility of a market collapse. We did recently go through a correction, but a full-on collapse is ALWAYS on somewhere on the horizon… always.
But right now we’re hearing “keep buying… keep buying…”
Since the last correction, we’ve gotten very high, very quickly. And while this should be a time for rejoice and celebration, the smart people who run Wall Street are full of worry instead. Of course, you won’t hear too many big banks say it, but they’re worried.
Why are stocks trading near all-time highs?
It’s not the economy. It’s not the jobs market. And it’s not the housing market. Although housing is recovering somewhat (don’t tell the millions of “homeowners” who are still underwater on their mortgages), the unemployment rate is a strong 5.1% (don’t tell the millions of people who can’t find a “real” job or are only working part-time) and the economy is rolling along with “positive growth” (1.5% in Q3, less than forecasted… uh oh).
It points back to the Fed and their policies to print money and keep the lending rate near zero. While this is touted as a great thing for the U.S (mostly the uber- wealthy), all it does is dilute the real value of the dollar, making just about everything more expensive… (don’t tell the FED, believe it or not, they think rent and food are still too cheap)… even stocks.
Think about that for a moment. Because the Fed is printing money, a stock could be priced at $10 one day and $10.25 the next without any fundamental or monetary change in the company. We’re chasing stocks irrationally.
When cash is continually printed, it makes your “real” dollar worth less… basically it takes more US dollars to buy the same earnings it did just a little while ago. Eventually, the fundamental issue of valuations and real-world dollar strength will catch up with the market and that means bad news for buy and hold investors… when exactly will this happen? Who knows? But two things are certain:
- The market will strongly retract at or around the time the Fed actually raises rates
- When the poor global economic fundamentals become clear enough to suckers like us, big time banks and hedge funds will flee weak, overpriced companies leaving us holding the proverbial bag. Believe me, the big boys already know what’s happening and are just waiting to unload on us again. If we’re willing to keep buying, they’ll keep selling to us.
Ironically enough, the low rate environment will eventually cause stocks to tank. The market will realize the smoke and mirrors supporting valuations is bunk and will run for the hills regardless of rates.
But… right now, the market is somewhat primed to head towards new all-time highs, regardless of the underlying economic fundamentals of both the USA and the world in general… for reasons already stated (technically, the S&P 500 could either hit new highs or quickly fall back to 1,990).
While buy-and-hold may work out in the very long term, the state of the US markets makes this strategy very scary right now, especially if you plan on starting this strategy NOW and holding long term. If you’ve got a portfolio that’s 20 years old with 20 year-ago buy-in prices you’re going to do just fine. But don’t begin that now. We’ve got a much better, safer strategy to use for at least the next two years or so. The best part is, it doesn’t matter which way the market goes, we’ll be ready.
Until then, let’s enjoy this zero rate environment. Time to get that re-fi paperwork finished up.
Until next time…
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