I wish I knew. The nature of shocks is they usually come out of left field. But still we fret. Individual investors are apprehensive today, concerned about the recovery and wondering where the next Bubble is. Owners of stock are enjoying the fruits of a rising market but they are not true believers. Wall Street is climbing a classic “Wall of Worry” today.
Our take is, there are no 2000 (the tech crash) or 2008 (the housing bust) bubbles out there right now. There are mini bubbles to be worried about, like the internet and social networking stocks and parts of the credit market including junk bonds. These are areas of concern. But the housing market and even the overall stock market, we do not see these as bubbles.
A big economic concern now is when will the Fed raise interest rates? The consensus is that the Fed will not push up short rates until the economy is on firmer footing or until inflation looks like it is gathering too much steam. This means no rate increase before 2016, or possibly late 2015. We think it might happen sooner. The economy has added 8.5 million jobs since 2009 and we are now back to the previous peak in employment which was January, 2008. The majority of the Fed seems to think that the pool of long-term unemployed combined with workers who have left the job market but who would come back (see above) will provide enough workers to fill job demand without pushing inflation higher.
The problem however is, we are in a very competitive global economy today, jobs require ever more skill, and technology is reducing the number of workers needed to produce things. So it may be that a significant number of the long-term unemployed or recent job market drop outs are simply not that competitive in this new world. The job market may be a lot tighter than it appears. This of course means rising inflation and also rising interest rates.
At first blush this does not sound good for stocks. Costs going up mean lower profit margins and this combined with higher inflation and interest rates, can’t be good for stock prices. But the other side of the coin is a tighter job market means higher wages and this leads to increased consumer spending. And historically stocks have done perfectly well under ‘moderate’ and rising inflation, that is inflation under 5%.
So we are not necessarily worried about the ‘rising interest rate, rising inflation’ scenario. It might just signal a more solid economy. Laszlo Birinyi a well-known market trader and analyst has written a new book, The Master Trader. In it he says, “It is smart to be Bearish but not necessarily profitable.” What he means is, getting out before a market decline sounds good but in fact you rarely can time the sell and buy points that well. The stock market still best rewards the long term investor. So where is the next great shock? Unfortunately, we need to stay tuned.
