Yesterday we kicked off with a bit of wry symbolism. Today we’ll go for outright humour. The front page headline in the Financial Review reads ‘Hockey: we will tax less’. Seriously Joe? That’s what you all say.
But we’re not going to talk about the budget today. It will pop its head up tomorrow, no doubt. We’re not going to talk about China either, except to say that total credit growth for the month of April was ¥1.55 trillion, down 25% on the March figure. But it was within expectations. Credit growth is still running at a hefty annual pace of 15.7%, but it’s slowing sharply.
With the Chinese authorities reluctant to resort to old school stimulus to boost growth, we would expect the rate of growth to continue to fall. This will put further downward pressure on China’s economy.
Before we move on, just a quick note to let you know we’ve made Phil Anderson’s speech from the World War D conference available, for free. We’ve added the first part of his speech to the Anderson Project (where you may have already seen his interviews with Dan Denning) and part two will be available from Wednesday. If you’re interested in seeing what Phil had to say (it’s very different to your standard Daily Reckoning fare), go here.
Meanwhile, the main US stock market indices made new all-time highs — again — overnight. The S&P500 was up 1% while the Dow Jones Industrial index closed up 0.7%. What caused the renewed surge? No one seems to know for sure.
The Wall Street Journal’s guess seems like a good one:
‘Monday’s rally came on the back of little news and relatively light trading volumes. Wall Street trading desks said the gains were driven largely by hedge funds piling back into stocks that have sold off this year likely reversing bearish positions they took earlier this year rather than by big investors placing fresh bets on the market’s future direction.’
You can see the latest rally in the chart below, over to the right. The volume indicator is at the bottom of the chart, and the past few days volumes have been quite low. To get excited about a sustainable breakout, you want to see a surge in volume.
S&P500 Breaking Out?
Otherwise it’s more than likely just a short covering rally, which is a feature of markets as they’re heading into (or are in) a blow-off top phase. That is, no one can really afford to be ‘short’ the market because the upward pressure is unrelenting. Betting on a fall is a losing trade.
European Central Bank Chief Mario Draghi was probably responsible for the latest ‘no news’ rally. Late last week, he continued to hold equity markets in the palm of his hands by virtually promising to ease interest rates at the next meeting.
He’s clearly feeling a little miffed at all the attention the US Federal Reserve is getting and wants to prove that his jawbone is just as functional as those of his colleagues at the Fed.
We are in an era of peak central banker belief. They say jump and the stock market asks, ‘how high’?
Check out the VIX index, below. It’s a measure of volatility, and is also known as the ‘fear index’. It’s dropping back down into the realm of supreme complacency. Why worry when the Fed, the ECB, the Bank of Japan and the Bank of England have your back? Who needs insurance?
As you can see, the index is back at 2013 levels, and not far off the brief period of ‘who cares about anything because the Fed will sort it out’ which occurred in late 2007 and early 2008. That was just before everyone started caring about everything.
It will all happen again. It’s just a matter of time. Maybe markets continue to melt up for a few more months yet. Although when you look at this longer term chart of the S&P500 (below), you can’t help but think that the melt-up phase might be nearing exhaustion.
You could easily argue that the melt-up phase began in late 2012. Sure it could keep going, but it doesn’t look like a good long term bet. The biggest problem here (if you’re an investor) is one of values. There just isn’t much value left at these prices.
Can the stock market melt-up continue?
Great students of market history like Jeremy Grantham and Dr John Hussman both see the S&P500 delivering negative returns on a 7 year time horizon from current levels. That is, by 2021, your portfolio will probably be down a few percent from current levels. (The Australian share market tends to follow the US, so while valuations are not as extreme here, we won’t be spared the fallout).
That’s assuming you can handle the gut-wrenching moves in the intermediate period. Hussman reckons you should expect a 50% market decline before the cycle plays out. Not many investors can hold their nerve through such a move. Especially not those who bought when prices were too high.
Hussman doesn’t pull any punches with his latest letter:
‘With advisory sentiment running at 56% bulls and fewer than 20% bears, with most historically reliable valuation metrics about twice their pre-bubble norms (and presently associated with negative expected S&P 500 nominal total returns on every horizon of 7 years and less), with capitalization-weighted indices near record highs but smaller stocks and speculative momentum stocks diverging badly, and with a Federal Reserve clearly intent on winding down the policy of quantitative easing that has brought these distortions about, we continue to view the present market environment as among the most dangerous instances in history.’
Should you listen to him though? He’s been wrong about this market for a while now, as have we. And he could continue being wrong for another six to 12 months…nobody knows. After all, this time is different. Global central banks are determined to prop asset markets up in a historically unprecedented way. And the fact that everyone inherently believes it makes it such a powerful force.
Believe what you will. It’s a (sort of) free world. But when trying to divine the future, all we have to go on is the past. And the historical record is telling you to be very cautious here, even if it makes you look like an idiot for another year. There is nothing new under the sun.
for The Markets and Money Australia