 |
Adrian Mastracci, portfolio manager at KCM Wealth Management, says “Investors may well continue to be treated to more market upside over time. However, it should not be a surprise if one day the landscape changes." |
Vancouver, BC (February 12, 2007): Adrian Mastracci, fee-only portfolio manager at Vancouver based KCM Wealth Management, comments on the much anticipated US soft landing.
Since mid-2006, many thought that a US soft landing would have landed by now. To much dismay, markets have inched upward on most days. Discounting the less than stellar economic news.
Bernard Baruch, American financier (1870-1965), once said: "If all you have is a hammer, everything looks like a nail."
Forecasting economic trends with accuracy means processing 40 to 50 major data releases every month. Then interpreting the group correctly. This is far from an easy task.
Take Canada. Economic activity has declined. Last Friday we got terrific job creation numbers, yet the markets sold off broadly. One worry is that productivity could slip. Hence, good news may turn to bad.
Benign inflation and low interest rates have had the upper hand in the US. They've been driving the markets for some time and may well continue.
Billions of dollars in accounts all around the world are also looking for a home. Most of that cash typically finds its way into equities. Few investors seem concerned about direction of future prospects.
Reading tea leaves
Is this continued long-term growth or a prelude to thin ice? Nobody really knows, but investors are wise to mull over both sides. Especially, dealing with a market correction.
It’s bound to happen. One day we’ll wake up skating on thin ice. That day may be soon, or it may take a while. I don’t know the when, but I do know what is likely to happen.
When that day arrives, other economic issues will make headlines. Like consumer debt levels, company valuations and government deficits. Perhaps trade gaps, slower earnings, US dollar value and US housing markets. Possibly world events, lack of saving rate, and softer job prospects.
Any one of these issues is capable of changing the tone of the markets. Some will say that they didn’t see them coming. As an aside, this is a very busy week for important economic releases.
For history buffs, the math indicates that investors have had a bear market, on average, nearly every 5 years since the year 1900. Typically lasting from 3 months to 3 years.
The good news is that we’ve recovered from each bear market. The last bear ended in October 2002 and gave rise to the current bull market. Which some analysts argue could lose a few puffs of steam.
Thinking out loud
Interest rates and corporate earnings are key market movers. The first is not expected to move much either way. Many analysts expect the second to soften.
Companies have delivered 14 consecutive calendar quarters of good earnings. Keeping tabs on upcoming earnings warnings will offer clues on the future.
Let's consider these three possible outcomes:
- Say the US soft patch sticks. I can picture the Dow bears migrating toward the 11,000 ballpark.
- Say the soft patch is benign. I can imagine the Dow bulls moving up toward the 13,500 ballpark.
- A roller coaster to more upside and then a reversal to the downside. Or vice-versa.
Incidentally, ever wonder how bull and bear markets got their labels? As the good story goes, bulls throw things up with their horns, while bears strike things down with their paws.
Today's frustration is that market analysts can make both the bullish and bearish case. Major economic indicators frequently waver between those two camps.
Investors may well continue to be treated to more market upside over time. However, it should not be a surprise if one day the landscape changes.
Beware. Some of the shine could come off the economic rose. Enough to make an impact on expectations.
Smart money is always ready for both outcomes. The ongoing seesaw between bulls and bears is a well-established tradition.
|
