For Once – Some Plain English
If the stock market does not make sense to you, it likely boils down to synchronicity. The stock market anticipates the future, so it rises when the present seems awful. Then, when everything looks fine again, the stock market pulls back into a correction. It seems maddening to the average person, but stock market performance results from the time horizons of a myriad of traders and investors.
Long-term investors keep the needle generally pointed north. Short-term traders give us the ebbs and flow along that path. Generally, corrections of 10% or less arrive courtesy of the short-term traders. When a correction begins to exceed 10%, long-term investors are likely becoming nervous and beginning to sell as well.
Long-term investors tend to stay the course, excepting the most exigent of circumstances. When long-term investors head for the exits, corrections carve much deeper as we saw in March. If the long-term crowd becomes despondent, we experience challenging bear markets or consolidation periods that take many years to resolve (e.g., 2000 – 2009).
To make matters more complicated, the government has tended to get involved in recent years when the entire universe of investors sour on the markets. There are times, such as March, when every investor wants to sell simultaneously, and nobody wants to buy. The government, through the Federal Reserve, steps in to help cushion the blow. Then you end up with a rational market (as investors sort through the issues at hand) with an artificial element, as the Federal Reserve influences rational investor behavior and thinking.
As the year closes, we can observe that the stock market has recovered significantly since the March crash. To some extent, the comeback has been artificially induced by government policies. Yet, the recovery is also quite real. Company earnings have improved from their worst levels.
Lately, investors have been taking profits in leading stocks that were the first to rise after the crash. These stocks benefited from people staying at home (e.g., Amazon). The good news is that investors, rather than hoarding their profits, have reinvested them in more traditional, economically sensitive companies that will benefit as the economy expands again in a post-vaccine environment (e.g., Caterpillar and Chevron). When I refer to “breadth” in our more technical discussions, I am identifying that a broader group of companies are beginning to attract investors rather than just a small group of tech names. The market rally becomes healthier and more sustainable when it broadens out and becomes more inclusive.
At this writing, the stock market is sputtering a bit. Partly, we see indications that the short-term crowd is fully invested, possibly lacking additional funds to carry the market much higher, at least in the short-term. More lockdowns, a more contagious virus, and a rather slow rollout of a yet unproven vaccine has put a temporary damper on the narrative of the traditional economy recovering as soon as we would like to see. Government policies continue to favor the bull market, so while a correction may be underway shortly, the overall bull trend is likely to remain intact.
It bears mentioning that the contentious political environment at hand also negatively impacts investors, not to mention business and consumer optimism. The prickly environment remains a risk and could cause the market’s ebbs and flow to become more volatile.
The general public feels fleeced – both by the 2007-2009 Financial Crisis and now the Pandemic. A significant portion of the American public does not benefit from the stock market or real estate investments. All they see are corrupt politicians and Wall Street bankers living large, with no consequences or accountability for the ravages they have sewn, negatively impacting normal, hard-working Americans. The latest Stimulus bill, loaded with pork and favoring billions in foreign aid over a pittance for suffering Americans, has poured gasoline on this fire. As an example, $14 million to study the effects of Transgenderism in Pakistan? Really? Is this our government’s priority with so many Americans suffering, losing their jobs and businesses?
Some of the disgruntled Americans end up on the left as so-called “Bernie” supporters. Some of them end up on the right as the so-called “Deplorables” or Trump supporters. It would be a scary day in Washington, D.C., if both of these groups ever got together, united by their common disdain for the current ruling class, and recalled every Congressman and Senator currently in office. Anyway, one can only dream, right?
If there is a risk at hand, something that might arise unexpectedly as a so-called “Black Swan” event, the genesis might very well be rooted in the public’s discontent with the malevolence currently masquerading as our government. This theme will carry forward into 2021 – and it contributes a certain dissonance to the most optimistic of forecasts.
So, where does that leave us for the week ahead? A final stimulus package, especially if it includes a $2,000 payment rather than $600, could give us one last thrust to new stock market highs even before year-end. Then I believe that a 5% to 10% broad, profit-taking correction will get underway early in the year.
I will have more to say about the year ahead and some exciting announcements in a few days.
At this writing, the core Navigator Algorithm model is up 896% year to date. It is the best year I have ever experienced as an advisor. I am glad you had the opportunity to experience it with me, and I hope these writings have been helpful.
I wish you a Happy New Year – and I intend it to be a profitable one for all of us!
A.F. Thornton – 12/27/2021