If all an investor did these days is watch stock charts without reading news which include terrorist attacks, declining global economies, and the US S&P 500 companies projected to return a fifth consecutive quarter with a decline in earnings, they would be shocked.
Investors must be asking themselves how can the S&P 500 continue to appreciate while the earnings of these same companies continue to decline every quarter since March of 2015? Add more confusion is more than 30% of global sovereign bonds (over $13 Trillion) now have negative yields up from NONE two years ago . Imagine if government officials only knew in 2014 that in 2016 they will be issuing negative bond yields in which the buyer pays them interest!
I assume the conversations between central banks goes something like this:
“I need to borrow some money, and you need to pay me to do so…”
“Isn’t that the opposite of how the loan to borrow relationship functions?”
“Ok, I will take $13,000,000,000,000,000,000.00.”
*heads to equities market*
Well, maybe that wasn’t the exact conversation, but my point is that this movement is unprecedented.
This has to be the largest separation of opinions in recent history as growth investors are pushing up equity prices due to confidence profits will be returning while other investors (that include hedge funds) view the best place for their client’s funds are bonds that cost them money to own plus management fees. Randall Forsyth of Barron’s is equally confused stating this weekend:
“The flood of money from central banks from all corners of the world has lifted prices of assets, most notably bonds and stocks. Which has produced another paradox: record -low interest rates – typically a sign of economic weakness – alongside record-high stock prices – usually a sign of strength”
None the less, the US indices had a good week as the post-Brexit rally continues. The DJIA rose 2%, S&P 500 1.5%, and NASDAQ 1.5%. On a technical point, the S&P 500 blasted past a key 14-month resistance of 2130 to close the week at an all-time high of 2161.74. Below is the chart of the S&P 500 with the 50-day simple moving average (orange line) with the 200-day moving average (red line). Technically the S&P 500 has not been in this positive bullish formation for more than a year of stock prices above the 50 day which is above the 200 day and typically a good sign for more upside potential. The resistance of 2130 has now become support meaning that for the S&P 500 to stay in a positive trend, it will not drop below 2130. However, dropping below 2130 will cancel the positive trend and may result in more downside decline.
This is the rally no one understands much like the presidential nominee outcome. Both candidates have unfavorable ratings from the majority of their own party. As Americans are confused about what to do in November, investors are equally challenged. Irrationality abounds, and it seems the return to normalcy is in the distant future.
What does this mean to me?
From 1997 to 2000 investors were equally confused on the rally of IPO companies that had no earnings, significant debts, and many with less than 30 employees. Some of these internet start-ups quickly had market valuations as their stock prices soared that exceeded long-term established boring institutions like banks and insurance companies. Articles were published about the “new normal” that stock valuations need not consider profits but future potential. Warren Buffet refused to buy into the internet craze and for years missed out on huge gains of these new start-ups claiming that fundaments do matter. As investors soon learned in 2000 fundamentals do matter, and only a few of these start-up internet companies exist today while their investors lost 100% of their money. If you are nimble with your investing, there are profits to be made for the short term. However, fundamentals do matter and eventually the “new normal” will become normal again.