Where is the Stock Market Going Next? - Weekly Blog # 680

 

Mike Lipper’s Monday Morning Musings

Where is the Stock Market Going Next?

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –

                          

The job of the analyst is to consider alternatives, which enables the owners of capital to make decisions concerning their separate needs and time frames. As an analyst, it is not our job to pass judgment on the proper path forward. Our task is to guess the most likely direction in terms of the most favorable risk/reward ratio. 

Combining my trained instinct as a US Marine Officer and a thoroughbred amateur racetrack handicapper, I look for better than average risk/return opportunities by avoiding massed crowds. I do this by observing what I see around me and putting together a portfolio of reasonably low risk of loss with an acceptable reward. I see market sensitivities through the following lenses: 

Stock Markets Moving in Opposite Directions 

In the latest week, the Dow Jones Industrial Average (DJIA) rose +2.67% and the S&P 500 +1.23%. The NASDAQ fell for a second week by-1.51%. The percentage of the stocks listed on the New York Stock Exchange (NYSE) hit a new high of 26% vs. 11% for the NASDAQ. According to the Dow Jones Standard & Poor’s indices, the best performing stocks were US Select Dividend stocks +3.48%. Internet Services stocks –5.3% were the worst.  Perhaps the best encapsulation of this lack of confidence was the stock price movement of T. Rowe Price (*), which reached a high of $189.42 on Friday vs its low of $179.29 on Monday. The other four days of the week produced higher volumes than Friday, which declined 40% from its peak volume on Tuesday. 

 

(*) Held in private financial services fund and personal accounts.

Mutual Funds Capture the Views of Both Individual and Institutional Investors 

For the latest 52 weeks, the average US Diversified Equity Fund (USDE) gained +60.1%, with the average S&P 500 index fund being up +47.59%. Just seeing those results suggest caution in anticipating large gains for the next 52 weeks. In the current week, the average USDE was down -1.06%, while the average Commodity fund was up +3.01%. Clearly a different assessment of the impact of rising inflation on the general stock market. 

Congressional Budget Office (CBO) Studied Views

Their non-partisan view is that by the middle of the following decade (2030s), the size of interest payments will be larger than current deficits. Paying interest on interest is not a sound financial plan. The Congressional Budget Office is also on record saying private economic forecasters have a bad record. This was before Friday’s miss on the expected surge in jobs. 

Eyeball Observations 

We visited The Mall at Short Hills on the Saturday before the US celebration of Mothers’ Day. My niece noted that there were only a few less empty store locations than about a month ago. Nevertheless, the crowd approached a Christmas season level, with one major difference, shoppers were not carrying a lot of labelled shopping bags. They must have been purchasing smaller items. I suspect they were spending their government “Roman circus” or “bribes” from the stimulus payments before prices rose further. While not many looked at Saturday’s Wall Street Journal (WSJ), those who did could see that 85% of the weekly prices shown were rising. 

The Political Game 

The only “blood sport” played in Washington DC is for the next election.  For a some aging politicians, the 2022 congressional elections leading up to the 2024 Presidential election will be their “Last Hurrah”. There are some that see George Orwell’s classic “1984” introduction of “Newspeak”, its purpose was to hide intent. For example, “War is Peace” or “Ignorance is Strength”. Today they might use “Fair Share of Taxes” for capital redistribution. 

The Federal Reserve

For those who still believe the Federal Reserve determines short-term interest rates, it is wise to understand the political position of the so-called independent governors of the Fed. The Fed is probably the only central bank that directly answers to the nation’s political power. In our case the President appoints the governors but has difficulty exercising control. Except, votes were unanimous when both the Yellen and Powell boards raised interest rates. (Various Presidents and members of Congress have tried to reduce the theoretical “independence” of the Fed.) 

In the “tug of war” between the Fed and elected politicians, the key signposts are interest rates. Low interest rates are favored by borrowers, including by a few past Presidents. Savers want interest rates high enough to cover both inflation and the incipient cost of defaults. The political problem facing politicians is that financial markets recognize government interest rates do not compensate for future inflation. Consequently, private sector rates have adjusted upward and the foreign exchange value of the US dollar has declined against a few of the available alternatives. Under an activist government at the Treasury, the SEC and CFTC can expect regulatory attacks to force a closing of the gap between government and private market interest rates. This battle is likely to lead to troubled markets.

Currently, with lots of enthusiasm in the markets, please be careful with your investments. The winning odds are coming down and reducing the risk/reward ratio, probably for a year.  

What do you think?

Did you miss my blog last week? Click here to read.

https://mikelipper.blogspot.com/2021/05/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2021/04/four-letter-words-to-sounder-investing.html

https://mikelipper.blogspot.com/2021/04/the-other-side-weekly-blog-677.html

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