The rest of the world’s stock markets have been falling since May…it is time for us to join them?
With some help from Monty Python’s Holy Grail, we investigate
October brought a shocking turn of events to investors in the U.S. stock market…shocking, that is, if all you watch is the U.S. market. After all, we are 6 months into a decidedly negative period for indexes that track Europe, Japan, the rest of Asia and the Emerging Markets. There has been little sign of letup in this decline, apart from the occasional “insta-rally” that lasts about as long as it takes for a cup of coffee to perk you up, and then subside.
The U.S. market, particularly the over-bought, over-owned, over-hyped S&P 500, has stayed afloat. Even after an obligatory 10% correction during the past month, it is still up 3.5% over the past 6 months. You could excuse holders of S&P 500 Index funds from taking the attitude of the iconic wounded knight in the movie “Monty Python and the Holy Grail.” To S&P 500 investors, October was “only a flesh wound” after 9 solid years of nearly uninterrupted growth.
I can give you all of the technical, quantitative and fundamental evidence that points to the U.S. stock market giving in to this bearish world trend. But while the S&P 500’s price has bent, it has not yet broken. The post-election period may or may not provide the resolution to that. And the U.S. Dollar remains strong, which is a big reason for the out-performance of our market over those shown in the chart above. After all, those foreign stock prices are converted back to Dollars, and that weighs on the ETFs presented there. Still, the S&P 500 by its nature is an index weighted toward yesterday’s winners. That alone should raise a red flag any time it persists in outperforming the markets of the globe for a while, and then slips as it did during October.
As usual, I am less about making predictions than sizing up the trade-off between reward and risk. And with markets bending or breaking, the economy at a stage where it “can’t get any better than this”…so it likely gets worse from here…and cash yields steadily climbing, it appears to me that reward potential comes with a heck of a lot more risk than it did 6 months ago. That favors flexible strategies, the ability to profit from down markets instead of only up markets, and more proactive use of cash and equivalents.
Of course, what you do with that information depends on another memorable line, repeated during the aforementioned Monty Python classic film: “What is your quest?”
For research and insight on these issues and more, click HERE.