The market is steam rolling forward against all odds climbing that wall of worry. Few thought it was possible, which of course is why it’s happening.
Investors have created this expectation that all of the world’s ills simply must bring the market down. The powder keg of Europe, the high unemployment in the US and the seemingly inevitable hard landing for China to name just a few, would be just too much to bare. However the market likes to surprise the most investors possible at any given time living up to the axiom, “if it’s obvious, it’s obviously wrong”!
Now let’s be clear. The major headwinds of the enormous debt crises in the developed world will certainly bring the market to its knees eventually. After all, the immensely over-indebtedness of Euroland and America along with the major demographic obstacle of a rapidly aging population well past their peak spending years, will without a doubt create a massive deleveraging and slowing economy. This is well chronicled in the book, Facing Goliath: How to Triumph in the Dangerous Market Ahead, a must read for any and all who hopes to retire in the next 5-10 years or is already in their golden years and wants to protect and grow their families nest egg. Yet, the facts are the facts: stocks are rising and “the trend is your friend”.
The main reason is simple: Bernanke and the Federal Reserve essentially initiated QE3 last week with its announcement that they were going to leave rates low into eternity, basically continuing QE Mini-Me. In addition, The Fed also set a core inflation target of 2% which gives them the right to start buying bonds again if inflation goes below that, which is likely in the months ahead. Intuitional investors smell a QE3 like great white sharks smell blood. Of all the supposed indicators, the one that seems to hold true the most is “you don’t fight the Fed”.
Although many investors may wonder whether this primary uptrend is part of a new bull market, evidence suggests it is simply an extension of the bull market that began in ’09. The difference is significant as a new bull market would have years to run while the bull market from the Mar. ’09 low is almost 3 years old and clearly aged. This being the case, investors must avoid complacency and remain alert for signs of a top, as a rally in an old bull market would more likely be measured in weeks or months and not years. Certainly the administration is hoping that it outlast the election….but I wouldn’t bet the farm on it.
Investor Strategy
The market is definitely due for a pullback, but so many people have been waiting for one that it might not come until the market is much higher. Nimble traders can take advantage of this rally, but the key is to be “Tactical” and avoid buy-and-hold (buy-and-hope) at all costs. Moderate and low risk investors should continue to focus on the market’s “sweet spot” which holds the most value such as income investments. If you can get 8-10% yields on corporate bonds, preferreds and MLP’s, why in the world would you take all the risk of the stock market. Invest for need, not for greed!
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