Where are markets going?
Markets appear to be immune to the political turmoil that seems to hit the news daily. This robust stock market of ours has gone up 13.8% over the last year (S&P 500). You can draw a line right under it and there's no break to the downside whatsoever since the start of the year. So what’s causing this maelstrom of progress and should we be worried?
Well, we have enjoyed global monetary expansion at a scale never seen before. There’s more money frothing around in the system and nowhere for it to go except for, what appears to be, into U.S. stocks. Stocks are far more attractive than bonds because yields are just do darn low to be attractive to investors.
Technically, the S&P 500 enjoyed a near-perfect straight line up since the start of the year and we are now reaching a major threshold. If you take a downside measurement of the market since the start of the 2007 crash to its bottom, and then flip that measurement upward from its same start, we are now reaching it (see chart). For a technician, this is cause for alarm because we have basically re-lived that market collapse in reverse (and over a longer timeframe). I would expect to see some consolidation because of the technical nature of what we’re about to face.
The Federal Reserve has announced shrinking of its balance sheet but on a very small scale and over a long period. That alone should not be a threat to the continuing bull trend. I wait to see if the market could be tested further from White House drama. I think it's going to take quite a lot to rattle these markets.
Meanwhile, talk with your financial advisor to determine if gains should be realized and consider a slightly more defensive posture if you want to help avoid short-term gyrations.