FYI | Jun 25 2014
By Peter Switzer, Switzer Super Report
One of the great fears of investors looking at Wall Street continually making all-time highs, is the understanding that the eventual crash of the stock market, whenever it happens, will follow, you guessed it – an all-time high.
Over the weekend the Dow hit another all-time high and the S&P 500 has now hit 22 record closes this year! So, anyone worried that a big market crunch is overdue might think 22 is a lot of all-time highs, which it is.
But a more relevant issue to ponder is – what causes a market crash? The general answer to that is a recession and it generally happens when there has been a period of rising interest rates, which is a part-contributor to the recession.
The yield curve indicator
Experts in the markets carefully watch the yield curve and they get worried when it is inverted with some arguing that a recession has never happened without an inverted yield curve!
For those who don’t know what I am talking about here’s a definition thanks to Investopedia, which goes like this: “An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This type of yield curve is the rarest of the three main curve types and is considered to be a predictor of economic recession.”
Now the yield curve has flattened off lately but it’s not inverted and provided my tips that the US recovery will be better than doomsday merchants have been predicting is correct, then it will stay upward sloping — the opposite of an inverted yield curve.
MarketWatch’s Mark Hulbert recently looked at the work of Arturo Estrella, now an economics professor at Rensselaer Polytechnic and who was a senior vice president of the New York Federal Reserve Bank’s Research and Statistics Group from 1996 to 2008. “Based on February’s data, the model gauged the probability of a recession in the next 12 months at just 1.33%,” Hulbert pointed out. “Though we don’t yet know what the precise outcome of the model will be at the end of March, I can confidently predict that it will not be appreciably different.”
Still value to be found
Adding to the case for showing no fear for being long stocks is the view of the chairman and CEO of BlackRock, Larry Fink.
"The market is more fair-priced here," he told CNBC and he advised viewers to remain “long U.S. equities" because he thinks stocks will be “higher in 12 months."
BlackRock is the biggest market player/funds manager in the world with more than $4 trillion in assets under management, so Fink’s view can’t be dismissed easily.
Fink and others like him believe central banks simply won't let stock markets be tripped up by interest rates rising too quickly. He says gains could be held back by earnings but he basically believes the central banks hold all of the aces and they are not going to let interest rates spoil our stocks party.
Last week Janet Yellen, the Fed boss, virtually said to all the urgers out there that she was not going to raise interest rates too soon and it is this that would hurt earnings per share expectations and then stock prices. So we’re in the hands of the world’s central banks and frankly, as they control interest rates, I’m pretty damn comfortable being long stocks.
Long in the tooth?
One of the best things I like about being overseas is that I read more widely than when I’m at home and USA Today’s John Waggoner actually looked at why we are spooked about all-time highs? Let’s face it, if your suburb is the most expensive or fastest growing do you sell it?
One American market expert I love reading is Sam Stovall, managing director of U.S. equity strategy at S&P Capital IQ. He argues that bull markets always make new all-time highs — “otherwise, the S&P 500 would never have gotten past 13.55 in June 1949, its first bull market high after the index started at 10.”
But this is the part of his analysis I reckon is worth noting. First, the average bull market spends about 7% of its life at all-time highs. The current one has seen all-time highs happen for about 5% of its existence.
So you could say that this bull market could be getting long in the tooth but long-term, secular bull markets like those in the 1980s and 1990s, spent 12% to 13% of their lives at all-time highs!
And I reckon the cunning clan of Janet Yellen and her merry band of central bankers are determined to keep their economies stimulated until economies grow hard, which means they are fighting the one big threat to stock markets – recessions – and until they look like they are failing, I am going along for the ride and so should you!
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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