The Market Rumbles Back

Since the beginning of the year, the good music played at “Stock-Mania” kept going, as the market reached higher levels quickly. Investors thrilled with their great performance in the previous year, thought that this year will also be filled with rosy dreams, rainbows, and golden pots; since prices continued to climb the “Stair Way To Heaven”. Suddenly, things changed dramatically by the start of February and brought back nightmares, of not a distant past.

What Goes Up Must Go Down!
Stock Market

It’s hideous to think that assets prices will continue to rise, even as they trade near all-time high territory. The fact that sophisticated investors continue to buy shares along with large-scheme share buyback programs by corporations, creates a state of nirvana that makes even the professional miss the fact that – yes! price will have to go down.

Bond Market

If you think that the stock market is a huge bubble, the bond market is even worse, as debt levels around the world continue to ascend, and everyone spends like there is no tomorrow. What makes matter worse is that the Fed will continue to normalize its monetary policy, backed by continuous increase in average hourly earnings which stands at $26.74 as of January 2018, and unemployment rate at 4.1%. This signals that bottlenecks effects in the labor market are being felt, prompting higher wages and spending.

Moreover, multiple central banks around the world have signaled that the time for cheap money will end soon; especially the ECB which have sighted that its QE-like-program might be tapered this year, as data continue to show improvement in the EURO area.

Where Do Investors Stand?

All of this will bring investors back to earth and will force them to face their obligations, shift the stock market trend, and remind every one of the below:

  1. The US job market will remain robust, until the end of the year (at least).
  2. Stronger wage growth created by bottlenecks and a surge in capacity utilization, will increase inflation forcing the Fed to continue its tightening policy, unless a(n) extreme event(s) forces radical adjustments
  3. Yields on U.S. debt instruments, as well as major G7 countries will increase, prompting fund manages to obtain a more balanced bond/stock portfolio, as yield on fixed income instruments become more attractive
  4. Highly leverage corporations should adjust their business operations, investment schemes, and de-lever their financial position.
  5. Volatility driven by the rise of algo-traders will create “air-pockets” like downward trends which will be sudden and large, and its effect will not only be limited to the stock market as in the case of Velocity-Inverse VIX -ETN.

Something to Think About

All the factors mentioned above have been present, but now are roaring back to life. What’s shocking is that sophisticated investors who are paid millions, based on their performance and experience, didn’t adjust their portfolio’s exposure in an anticipation of market pullback. How come them they are paid that much?

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