What Goes Up Must Go...

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Writing about markets going down is not much fun.  I would much rather write about going to my son's B-52 navigator graduation and may this week but last week I said I would write about things that cause the market to go down, so I will. 

What can cause the market to go down?  Anything.  In the short run just about anything can cause the market to go down.  Or up.  Short term ups and downs are hard (impossible?) to forecast but that is what the world is fixated on.  More than once I listened to the news and some bit of financial information came on--inflation up, the dollar weak, trade deficit a record--and thought, Ok the market will tank on that and, of course, the market went up.  Short term market movements are almost impossible to predict which explains the disappearance of that 1990's phenom, the day trader.   

So short term is out--ignore all the pundits, ignore the financial writers who are under a deadline, ignore the guy in the next cubicle who is thinking about getting back into day trading and concentrate on the long run.  Regular contributions over time into the equity markets. 

Boring.  Plus, as Lord Maynard Keynes said, in the long run we are all dead.  Ok, so let's look at what could cause the market to go down significantly and for a period of time, like in excess of three years.  I mean, nobody wants to be in a train wreck if it can be avoided.   

So here is what can cause stocks to go down:

rising interest rates,

inflation,

protectionism,

poor corporate performance,

politics,

irrational exuberance.

I'm sure there are more but I think I've covered the bases with these guys.  And they are all interrelated but let's take a look.  Rising interest rates are used by the Fed to wring out inflation.  So the real culprit is inflation, not rising interest rates.  But, you say, we have rising interest rates now.  Well, not really, we are only returning to normal.  The Fed beat down interest rates in 2001-2005 to get over the 2000 economic meltdown and 9/11.  Draw a line linking interest rates from then to now and the interest rates now are still probably below rates then.  But they are rising so bear watching, especially foreign rates.

Already touched on that but inflation is, I think, the primary cause of stock market weakness.  Panic inflation is an abandonment of society.  It's every man for himself and screw the other guy.  It is also a vote of no confidence in government and institutions.  For examples, check out Argentina, Mexico, and Brazil in the 70's and 80's and the Weimar Republic in the 1930's.  Or the US in the late 70's and early 80's.  None of which you remember so ask your parents.  It was ugly.  The good old days were a bummer.  And the stock market was dead in the water.  Actually, it sunk and sat on the bottom until 1982. 

Protectionism.  We are a global society but a lot of people, primarily politicians, refuse to accept the fact.  But blaming outsourcing and the exporting of jobs has a nice ring to it and makes out of work steelworkers feel good.  But those steelworkers have been out of work for a long time because we are not competitive in that field and probably never will be again.  The same goes for autoworkers.  It also goes for roofers--when was the last time you saw a guy up on a roof named Jones?

But we don't have protectionism, you say.  Oh yes we do.  Just ask those guys in Dubai and a bunch of other finance ministers changing their investment decisions as we speak because they don't trust us.  And they shouldn't.  The Dubai thing was stupid.  But it did introduce some bi-partisanship into the Congress.  Stupid but if you wanted bi-partisanship, you got it.  Watch out for protectionism--it starts slow and then really gets rolling and hard to stop.

Poor corporate performance is usually blamed on outside variables like inflation, high interest rates, regulation and foreign competition.  Corporate America is pretty good now.  It wasn't in the late 70's when they blamed everybody from Jimmy Carter to the Japanese for their performance.  If you hear companies singing the blues about external variables, head for the exits.

Politics can impact.  Republicans are mostly pro business and Democrats anti business.  I know that comes as a shock but usually works out that way.  My brother-in-law is very successful and voted for Clinton.  He was outraged when Clinton raised taxes.  I was kind of like, 'Dude.'  But, you say,  Clinton was president in a time of great market success.  Correct but not because of Clinton.  Except for the tax increase Clinton did nothing except get in trouble with women.  He left the market alone which rose on technology and the Baby Boomers generating a lot of wealth as they experienced their most productive years.  But watch out for politics and the impact on the tax code if certain groups get elected.

The biggest reason for markets going down is greed.  When things get going really good, they get out of control.  The roaring 20's led to the depression of the 30's but the steady growth of the 50's made for a pretty solid market in the 60's.  The 70's were a washout as the country regrouped leading to a great stock market from 1982 till 1987 when it got overdone and the market had the biggest one day drop in history. 

Then the market kind of sat around until the 90's and then really, really took off until hitting the wall in 2000 when the fundamentals got out of whack.  Well, everybody should have seen that, right?  No, they didn't because all the financial writers and analysts said, "It's different this time."  When you hear that, sell everything you got.

I'm not hearing it now.

    

Comments

[Hermes]

The negotiators appeared to be having a hard time defining what kind of cuts would occur at the end of the year 2012 if Congress failed to act on the committee’s recommendations.

[ballyache]

The Weimar Republic was gone by the '30s. And the period of hyperinflation to which you refer was in, I think, 1923.