Stocks seem to have flattened out since reaching their December 2013 pinnacle. Sure there was a minor sell-off in January, but stocks have recovered from that. The point to takeaway from current stock market valuations is this: the average has been unable to top the performance of the economy (total market activity). See below.
A stock market acting in Bull-like form is one where the Dow Jones Industrial Average leads the economy upward. But as you can see in the chart above, the Dow has been unable to outperform the economy (GDP) since its prior top – way back to October 2007. That’s not a Bull Market.
The reason many people refer to today’s stock market as a Bull Market is because of the Dow’s impressive reversal from the bottom of the ’08 crash. But regaining lost ground that was held prior isn’t a gain in land at all. It’s a return to the status quo – especially when considering the effects of inflation that have accumulated over the years. The chart below is the same one as above except it includes a trend-line for the DJIA that is adjusted for inflation (a.k.a. the Dow is Real terms.)
Just as the Dow has underperformed GDP in current dollars (Nominal), it has also done so in Real terms, after inflation. To consider this market a Bull Market is a total misnomer. Stocks have barely recovered in Real terms since the last meltdown – which is consistent with the economy.
A Bull Market doesn’t need QE to sustain high stock market valuations. Interest rates don’t have to be artificially pushed lower and kept at historic lows for the better part of a decade to aid a Bull Market’s underlying economy. Bull Markets are strong enough to handle market interest rates – higher rates, mind you, that would incentivize banks to lend and promote further economic expansion.
This is not to mention that Consumer spending during Bull Markets is vibrant. That’s so not the case today. Consumer activity grew at just 1% in Real terms in 2014’s first quarter, which prompted stocks to move lower by 1% during the time.
Around the world the picture also remains in the same sorry state. Germany is reporting strong economic growth in the first quarter only to be followed by a “considerably lower” pace in the second. Growth is uneven at best. China continues to expect production to weaken; and the EU reaffirmed its easy money positioning by announcing that it was open to more QE. In this case, the EU is nervous about deflation and sees printing more new money (not higher interest rates) as the solution.
They are as foolish as American governors.
Nevertheless, a weakening global position in major markets is also not indicative of Bull Markets. These added together are reasons why the Dow Jones Industrial Average cannot outpace economic output (Nominal GDP).
In other news, stock market corruption by so called high-frequency traders surfaced this week in the midst of the 60 Minutes feature on Michael Lewis’s new book, FLASH BOYS. Lewis is a great storyteller and expert investigator. And while large hedge funds and mutual funds risk losing billions of dollars with high-freq traders in the game (all of which are paid by dependent investors), it only marginally impacts independent investors following the Lose Your Broker method.
High-freq market participants look to shave fractional points from traders trading large blocks of stock. Most independent investors don’t trade enough volume to warrant their attention, and thus affect them less. Besides, if a couple of pennies per share are enough to throw a portfolio from gain to loss the problem isn’t high-frequency traders – it’s the philosophy behind the investment and the portfolio’s management.
The point I’m trying to make is this: invest in high quality companies and assemble them in a superior manner and a few pennies per share have absolutely no impact on long-term performance. These two tactics, superior construction and superior design, are the keys to financial success and independence. It is the Lose Your Broker way.
But this doesn’t mean that the stock market isn’t rigged like Michael Lewis suggests. It is; stock market corruption has been well documented in these blogs. To know this is to outperform the madness.
And in the same vein, the presence of high-freq traders in the marketplace doesn’t also mean that independent investors can’t easily make money in the stock market – at levels that greatly outperform professional fund managers. The 15-51 indicator is living proof of that. See below.
The flattening of stock market prices can be seen most easily in the latest quarter of 15-51 indicator. It hasn’t moved in months. And just so you know, flattening trends that occur within the action zone high are automatic triggers to act if action hasn’t already been taken. It’s never too late to make a move.
Other than that it’s the same old, same old.
Let me know if you have questions.
Stay tuned…