Jon Markman is the founder of Markman Capital Insight LLC, an investment research and advisory service in Seattle. He is a highly accomplished financial writer and winner of the Gerald Loeb Award for Distinguished Financial Journalism.
The main reason for the price ramp over the past week was a renewed risk appetite following the end of the fiscal policy stalemate in Washington combined with the certainty over the identity of the next Federal Reserve chair and her super-dovish stand on monetary policy.
You have two massive negatives taken off the table, and one big positive added.
Yet the advance has been muted due to the lingering sense that were it not for this extreme monetary policy support from central banks around the world, the global economy would be reeling. The latest exclamation point on that view came in the delayed U.S. non-farm payrolls data that showed companies have gone on strike against adding employees. Plus banks are under attack from the federal government, which may be justified but it makes them more cautious on taking risks on the loans needed to get small business cracking.
What’s amazing about sentiment right now is that it is far from ebullient. No wonder, right? Here we are at new all-time highs on most market measures, and yet the economic data is still subpar, companies are reporting weak revenues, job growth is anemic, the public is furious at both Congress and the White House, the eurozone is just barely out of recession, China is on oxygen, emerging market growth rates are flattening and two recent World Series games finished in ways that had not occurred in more than a century.
The only real props for the market are low inflation, falling commodity prices, and a Federal Reserve on hold with the lowest interest rates in modern history.
How do you reconcile these threads? It’ pretty simple. Low inflation and a sidelined Fed are trump cards for bulls. They win.
Indeed, the sidelined Fed is enough to produce the fourth-quarter mega-rally we’ve been expecting. We are not looking for prices to go up forever, just enough of a little crazy a la 1999, which was the last time the Fed was absolutely on hold, due to the Y2k bug fears.
You have to ask yourself: Which would be more of a surprise right now: A market collapse, or a surge that takes the NASDAQ Composite up 30% to match its 2000 high?
No doubt the latter, which is so absurd it might just happen as excess liquidity, bond-selling, corporate stock buybacks, and short-covering by exasperated bears crying uncle could swamp sellers for a while.
A brilliant new long-term sentiment gauge created by one of my partners still senses a long-term top is being set in the Russell 3000, and forecasts that the next 12 to 24 months will be “flat to down.” But the view could be early, and the prediction does not mean everything will go flat or fall at the same pace.
Bottom line for me is that you don’t fight the Fed and lower inflation, or underestimate the power of a short squeeze. A mad year-end dash higher may yet await.