Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Stock Market 2014 Party On!

Stock-Markets / Stock Markets 2014 Dec 24, 2013 - 08:57 PM GMT

By: Puru_Saxena

Stock-Markets

BIG PICTURE - Interest rates are near historic lows, credit is cheap and the prominent central banks are not planning to pursue tough monetary policies anytime soon. Consequently, the stock markets of the developed world are rallying and their property markets are recovering.

There can be no doubt that the world's business activity is mediocre, but the financial markets are primarily driven by monetary policy. Remember, the risk free rate of return determines the value of every asset and with near zero interest rates, it is hardly surprising that prices are appreciating.


At some point in the future, the party will end but we suspect that the next bear market may only arrive after 2-3 years. If our assessment proves to be correct, the Federal Reserve will begin reducing its bond purchases next summer and if the US economy gains enough traction, QE may end by late 2015. Thereafter, the Federal Reserve will probably leave the Fed Funds Rate unchanged for several months and rate hikes may only start in 2016. Furthermore, in line with the previous cycles, the Federal Reserve may increase the Fed Funds Rate in baby steps and this should give investors sufficient time to prepare for the next major downtrend.

In any event, it is notable that in the past, economic recessions and bear markets have always been preceded by the inversion of the yield curve (Figure 1). Today, the yield curve is very steep and this suggests that the ongoing primary uptrend in stocks has much further to run.

Figure 1: Yield curve inversion precedes bear markets

Source: www.crystalbull.com

At this stage, nobody knows when the yield curve will invert but if we are even vaguely correct, the inversion may only occur in 3-4 years. Accordingly, apart from the usual pullbacks, the primary uptrend in stocks should remain intact for as far as the eye can see.

Even though we remain optimistic about the long-term outlook for stocks, we suspect that we will see some volatility when the Federal Reserve starts tapering its QE program. Nonetheless, we believe that any turbulence will be short-lived and as long as the Federal Reserve continues to expand its balance-sheet, the bull market will remain intact.

As you can see from Figure 2, over the past 5 years, the S&P500 has had a very tight correlation with the Federal Reserve's balance-sheet. This relationship implies that if QE continues for another couple of years, then Wall Street should stay on its northbound journey.

Figure 2: Expansion of the Fed's balance sheet vs. the S&P500

Source: Raymond James

From our perspective, there is no need for investors to jump the gun and as long as the monetary backdrop remains favourable, our readers should stay the course.

In terms of geographical areas, we continue to believe that Europe, Japan and the US will continue to perform well. Accordingly, we have over weighted our investment portfolios to these regions. Conversely, we are of the view that the emerging nations may not reward investors and this is why we are not exposed to these volatile markets.

Looking at various sectors, we see ongoing strength in banks, biotechnology, consumer discretionary, consumer staples, healthcare and industrials. Accordingly, our managed accounts are now concentrated in these industry groups.

You may recall that in last month's edition of Money Matters, we opined that the biotechnology/pharmaceutical sector looked promising. As it turns out, this industry group had a stellar month and we believe that it will continue to perform well throughout the course of this bull market.

Elsewhere, it appears as though the multi-month consolidation in Japan is now complete and the stage is set for a major advance.

If you review Figure 3, you will note that after oscillating in a trading range for almost 6 months, the Tokyo Nikkei Average has just broken through overhead resistance and is currently trading around its 52-week high. Furthermore, given the fact that the November-April period is seasonally bullish for Japan's stock market, it is probable that a powerful rally may unfold until spring.

Figure 3: Tokyo Nikkei Average - start of a new advance?

Source: www.stockcharts.com

At this point we want to make it clear that we are not fans of Japan Inc. However, with the ongoing unprecedented stimulus and the declining Yen, it will be foolish to bet against Japanese equities.

Over in Europe, it is notable that the majority of stock markets have broken out to multi-year highs and even Greece is now participating in the recovery. Interestingly, after declining by over 90% from its 2007-peak, the Athens General Share Index is now rallying and it has recently taken out its previous high. Therefore, aggressive traders can consider allocating some capital to this beaten down stock market.

At this stage, it is difficult to know why the Greek stock market is advancing but we suspect that the worst has already been discounted. If this is correct, then we may witness a big rally.

Turning to the emerging world, it is notable that the Brazilian, Chinese and Russian stock markets are struggling and this is in line with our expectation. Furthermore, the other prominent Asian and Latin American stock markets are also trading beneath their all-time highs and we suspect that this weakness will continue for several months.

If you review Figure 4, you will observe that over the past year, the MSCI Emerging Markets Index has declined in value and this is in stark contrast to the performance of the developed world. Furthermore, we suspect that when the Federal Reserve starts to reduce its bond purchases, capital will probably flee from these high-beta stock markets. Accordingly, we currently have no exposure to the developing world.

Figure 4: MSCI Emerging Markets Index

Source: MSCI

In terms of risks, we believe that the record-high margin debt on the NYSE will be problematic but this should not be an issue until borrowing costs rise. Furthermore, we are of the opinion that rising US Treasury yields should be monitored closely as a dramatic increase in interest rates may pose problems for the stock market.

Last but not least, we still recommend our readers to avoid Chinese equities. Our thorough research reveals that China's property market is extremely overvalued and at some point, we will get the inevitable hard landing. When that happens, bad loans will rise and may create problems for the banking sector.

For sure, China's administration has sufficient capital to bail out its prominent banks but that will occur in response to a major crisis. Therefore, until China's real estate prices come down to more reasonable levels, investors should avoid allocating capital to the world's second largest economy.

In summary, our strategy remains unchanged and we are still over-weighting the strong industry groups and geographical areas. Moreover, we are closely monitoring the situation and if the market condition deteriorates, our risk management system will kick into action.

Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets.  In addition to the monthly report, subscribers also receive “Weekly Updates” covering the recent market action. Money Matters is available by subscription from www.purusaxena.com

Puru Saxena
Website – www.purusaxena.com

Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients.  He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.

Copyright © 2005-2013 Puru Saxena Limited.  All rights reserved.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in