Evaluating the current market situation is easy, but predicting the future is where we run into challenges. Making major predictions isn’t something I always try to do because most people who try and do it end up being wrong. There are times however, where I have a conviction about a specific trade, and I go into it hard.
Going hard for U.S. equities was exactly what I did back in December 2012, and I alerted our CrushTheStreet.com members as well as our Premium Subscribers regarding this buying signal. This was a time where we were ending a year with a great amount of global turmoil and an uneasy stock market. We saw markets get shaken with economic problems spinning out of control in Europe with Greece all over the headlines, and still a very unstable U.S. economy. The market was up until even the end of 2012, and investors were hesitant as the government had to continue to raise the debt ceiling, and essentially admit that the financial situation was out-of-control.
Since December 2012, the S&P 500 has been up about 50%. Before we go into talking about the future, let’s discuss the past for a moment…
Why did stocks make such a big move since January 2013?
Among a number of reasons, after the 2008 crash and prior to December 2012, what I began to notice was that there was about four-years of negative news that theoretically should have kept the markets down and depressed. However, the bad news didn’t seem to ever be as bad as what everyone was expecting, and Wall Street kept on advancing without any major repercussions. The world still spun during QE announcements, government shutdowns, and reckless spending programs and investors were starting to sense this. People basically were at the point where they were numb to bad news, and it wasn’t scaring them anymore — investors were ready to take on risk.
This isn’t to say that just because the U.S. train hasn’t derailed yet, that it’s not going to happen. 2013 was certainly was a year where the financial problems were put on the backs of everyone’s mind as stocks and real estate soared giving everyone that “wealth effect.”
This combined with interest rates at zero percent from banks and other safer alternatives, gave investors no other option but to put their money into the stock market for the chance at higher returns. The government keeping interest rates artificially low, intentionally forced people to seek areas with higher returns inevitably directing people to buy stocks. The government wants people to buy stocks, and their low interest rate policy was an indirect way to incentivize people to do exactly this.
According to Trim Tabs data, investors put $348.63 billion into stock-based mutual funds and exchange traded funds in 2013. There was just a flood into stocks this year, and it really seemed as if investors stopped caring about the bad news and just moved into equities with a great deal of courage which pushed stocks higher.
What Does The Future Hold
Just like the investment world over the last two years has moved on investor sentiment and people emotions, so will the next two years.
Already, we are seeing oil prices significantly pullback, stocks slow down, and even real estate in some major metropolitan cities start to cool off. The shift in the economic atmosphere usually doesn’t happen overnight, but once it does start to change panic selling will take over and asset prices will correct in areas such as stocks and real estate. The simple fact that prices have increased so much since 2009 and especially in the last two-years, are giving investors across the board a nervous feeling that the time to sell is near!
The stock market crash of 2008 was not too long of a distant memory for people, and investors know that seeing a 50% correction in assets is not impossible. The baby boomer generation especially, will be most cautious as to how to manage their money because they will be looking to access it in the near-term, if they haven’t already.
I’m not predicting a 2008 style crash in the next two years, but the potential for a 20-35% correction is very likely and will send a shockwave of fear into the markets for those who aren’t prepared.
Approximately, every seven years the economy goes through a recession, and to be quite honest with you, everything is starting to feel quite bubbly and in need of blowing off some steam.
High Yielding Investment Idea
In times of stock market volatility, investors seek safety in the form of income. A security that I’ve recently purchased around $17, which is offering a dividend payment north of 8%, is Compass Diversified Holdings (CODI). Don’t look for this stock to give you much on the appreciation side of things, but it can be used to hedge against volatility against capital growth stocks because of the dividend in a time that can be a period of increased volatility. If stocks begin to sell-off substantially, this security here might actually appreciate as the demand for an income stocks will increase.
It’s never about trying to call the top or buy right at the bottom. Both of those are very ideal in terms of profitability, but in every situation, just being profitable beats losing money trying to be too greedy in the markets.
Prosperous Regards,
Kenneth Ameduri
Chief Editor at CrushTheStreet.com