Weather is a great metaphor for life – sometimes it’s good, sometimes it’s bad and there’s nothing much you can do about it but carry an umbrella.
~ Terri Guillemets
A couple of weeks ago Kevin at Out of Your Rut asked a question that a lot of people ask themselves and others pretty regularly: Where Do YOU Think the Stock Market Is Headed? He presented both the optimist’s view and the pessimist’s, then challenged readers to answer a series of questions to arrive at their own view of where the stock market might be headed next.
I know there are some who would disagree with the idea of even raising the question. I’ve written a couple of articles about the ostrich effect and the other pitfalls of passive investing recently, so I won’t go into those issues again here. Suffice it to say that I think this “Where Is the Market Headed?” question is one that every investor should ask at least annually, and preferably quarterly. Perhaps a watched pot will never boil, but one left unattended presents its own set of dangers.
Kevin asked 8 questions to help us arrive at our own vision of where the market is headed, so I thought I might throw my 2 cents in on them here. I’m gong to answer the first four today and the next four in Part II. Please check out the original post on Out of Your Rut, read the comments, and then weigh in on the debate either here or on Kevin’s site. We are living in some pretty interesting times right now and it’s fascinating to see how different people are experiencing and reacting to them.
1. Which Way Do You Think the Stock Market Is Headed?
Long time readers will know that I lean pretty heavily toward the bearish camp. I think we are about 10 years into a secular bear market that could go on for another decade or more. That doesn’t necessarily mean I think the market will go straight down. Rather, I think we are in an extended period of much higher volatility in which we will see large swings in both directions, but with the overall trend heading lower.
I think that the massive rally off the March 9th, 2009 lows was fueled by the fumes of unprecedented monetary and fiscal stimulus injected into the global economy by central banks and governments worldwide, some of whom could afford it (China) and others who could not (almost everyone else). It seems like those fumes are now evaporating and we are finding out that there is not much in the way of real fuel for economic growth. For the near term, I think reality will bite and that means a downward trajectory for the markets with elevated volatility.
2. Where Do You Think It Will Be One Year from Now?
I’m usually really terrible at answering these questions on specific price targets and time lines. I’ll take a stab at it, but be advised that you’d be better off throwing a dart at a target than basing any of your decisions on my guesses. I think that there’s a better than even chance that markets will retest those March 9th lows sometime in 2010, and that they may even break below them, either this year or on a second retest in 2011. If that happened, it would probably be a good time to start looking for bottoming signals and put a little long term cash to work.
3. Given All of the Bad News, What Do You Think Will Drive the Market Higher?
I think there are two main ways in which the market could conceivably go higher. One is healthy and the other will only prolong the inevitable a bit more:
- Government Intervention: If central banks and/or governments (especially the Chinese) find a way to inject more stimulus into the global economy, traders may put the risk trade back on again and the markets would rally. This is the unhealthy route (the one our leaders chose in 2008) because it involves using debt to combat a debt crisis. A cursory knowledge of basic mathematics is all you need to understand that this is a bad idea. Not only are we adding to the global debt problem, but we are sowing the seeds of future hyperinflation by printing money to finance that debt. More bailouts would throw more fuel on the moral hazard fire as well and perpetuate the vicious cycle of boom and bust to which we’ve been subject for quite some time now.
- Reality Check: If the markets are able to face the reality of the tenuous global debt situation and send a message to governments that further fiscal imprudence will not be tolerated, we could find a real bottom, from which a more sustainable base can be formed. Granted, this message would be sent by way of a pretty big drop in both the equity and bond markets, with higher interest rates and lower stock prices resulting. Still, I think this type of forest fire is just what we need to finally clear out the dead wood (over-leveraged entities). We will then have fertile ground on which to build a healthier economy. It will not be easy, but sometimes the rocky path is the right one.
4. What Percentage of a Person’s Portfolio Should Be in Stocks Right Now?
Obviously there can be no one size fits all answer to this question. But in the interest of providing some sort of opinion on the question I would say the following: Whatever your preferred equity allocation would be based on your age and risk tolerance, take that percentage and make it smaller. The closer you are to retirement, the smaller it should be.
If you are already in retirement and are not an agile trader, I would recommend an equity allocation of 0% or close to it. This is a safety-first market climate, not fit for the inexperienced, less knowledgeable, or risk-averse investor. Even many experienced traders have been tapped out by the margin clerk over the past decade. Buy and holders haven’t fared well either.
As in the opening quote, I’ve often used weather as a metaphor for the markets and for life. Predicting the movements of markets and economies seems even more difficult than predicting the weather. The point of trying to do so is not to get the forecast exactly right, but to have an idea how to dress properly for the climate at hand and a backup plan for what to do in case you’re wrong.
Tune in on Thursday for Part II of this article and my answers to the next 4 questions in Kevin’s article.
How would you answer any or all of these 4 questions? Do you think it’s even worthwhile to try?