If you’ve been around the stock market anything more than a month and a day you’ve probably heard the expression: The market climbs a wall of worry.
All this old Wall Street adage means is that whatever the current issue, whether geopolitical, economic, or political, the investing public is relatively confident that these issues will be resolved favorably sooner rather than later. The confidence shows itself in the charts as either an advance or consolidation, but at least no pullback.
That’s the hope. Since there are no breaks in trend or price support levels, hopium keeps flowing in participants’ veins.
In recent days, weeks, and months, depending on who and what you read, the market is either overvalued or undervalued. (Market theory would say it’s fairly priced since current price has, theoretically, priced in all that is known.) Valuation alone keeps the future’s-so-bright-they-have-to-wear-shades crowd pounding away at the keyboards to prove that future earnings growth expectation is high showing supporting charts and data.
Meanwhile, the future’s-so-dismal-that-they-need-to-wear-tin-foil-hats crowd tries to prove the market is overvalued showing supporting charts and data declaring that we are facing a 20, 30, 40, even a 50% price collapse… take your pick.
What do I know? I’m a trader, an armchair Monday morning economist. I trade the wall of worry to the upside and the slope of hope to the downside. I can’t care about valuation anymore, not that any self-respecting trader ever did. I trade price action according to trend, up or down doesn’t matter.
However, the death of price discovery, the essence of the function of the stock market as it sorts out supply and demand, should have all participants concerned.
Valuation is dead. It doesn’t matter whether you read MarketWatch or Zero Hedge, two sites with views so opposite that you’re tempted to read both and divide by two to draw a conclusion; or seek out the nearest ledge.
Yes, Wall Street analysts still puke out their valuation models with their upgrades or downgrades of stocks sending day traders into action. Yes, mega Wall Street firm strategists and hedge fund managers with near rock star status still put out their long-term prognostications on both sides of the equation, bullish or bearish. Yes, market participants react, if only for a day, but that does not mean, under present circumstances, that either side is right, although inexorably only one side wins.
Both bulls and bears can’t be right at the same time and yet only time will resolve the issue of valuation just as an earnings report tends to reprice stock prices. If the actual earnings came in weaker than expected the price tends to drop since the current price was too high based on the newest report. Of course it is vice versa with the release of surprise positive earnings, the market reprices to the upside.
As the investing world is keenly aware, the Fed and its actions since 2008 has supported the stock market with low-interest rates and flooding the globe with dollars. Indeed, it has made support of the market an undeclared third mandate behind price stability and maximum employment. Current Fed Chair, Janet Yellen, admitted so in testimony before Congress earlier this week.
Someone who should know about such matters, the maestro of glib and obfuscation, former Fed Chair, Alan Greenspan, recently explained how the Fed was the main driver of P/E (price/earnings) multiple expansion in stocks. He went on to say, regarding price discovery, “When real interest rates start to move up, that’s when the crisis could hit.”
The Fed is responsible for inflation of the stock market. Greenspan states, “nobody wants to invest in the long-term because nobody knows what is going to happen.” Now, even though in that comment he was referring to long-term corporate investment for corporate growth, it turns out that John and Mary Everyman are frightened by this market for they too have no idea what is going to happen.
Consider, in no particular order of importance:
-Greek issue, still unresolved.
-The viability of the Euro.
-Terrorism, a potential game changer at any moment.
-Economic data points… take your pick, one good one is followed by a bad one. The market advances on bad news some days and sells off on good news on others… all due to Janet Yellen’s “data dependent” FOMC threatening to raise those interest rates that Greenspan referred to. The conundrum here: raising rates just adds to our interest on servicing the debt. (My personal view, the Fed will raise rates 1/8 to 1/4 of a point, note the sell-off in the market, and never raise rates again until hell does freeze over. But what do I know, I’m a trader, I’ll go where the market wants me to go.)
-Global economic activity is undeniably slowing, the dollar is too strong for our exports, and thus the S&P 500, and it’s threatening to move higher still.
-The collapse of oil has crushed the oil patch into layoffs of thousands of workers as well as the stoppage of capital expenditure (the Greenspan reference).
-U.S. Government interference with just about everything related to economics, and if you’re over three years old you already know that government fixes nothing, not even your preschool lunch.
Uncertainty in so many areas has historically been the engine of the wall of worry train. At this point, that engine is uncharacteristically strong by any measure. Where, how, and most important, when will fear start to get priced in?
The headwinds, to me, are great, if not insurmountable, especially regarding rising interest rates and servicing the debt. The market’s reaction thus far is inexplicable except for the acknowledged fact of Fed support.
I yearn for the old days, which are gone forever I fear, when the market could recognize bad news as bad news and react accordingly, and when good news was good news and react accordingly.
The proverb “May you live in interesting times” has caught up with me.