Market's Win Streak Must End, but Down Isn't the Only Option

Getting to Mars is a problem; figuring out our present stock market trajectory is a mystery.

Practical wisdom says market winning streaks must end sometime.  I would enhance that by stating an end of a winning streak doesn’t necessarily imply that the only way is down for equities.  At least that is the way it has been going for more than six years.

Quibbling market experts with free time on their hands talk about equity headwinds including overly-aggressive earning-per-share estimates, exhausted global central bank policy, and the ever-growing accounting gap between GAAP and non-GAAP methodology as being the catalyst to finally take the stock market down. Bulls speak in terms of expectations, not accepting the finality of the present, feeling confident enough that any ill effects of U.S. dollar strength and oil weakness are behind us, that real global GDP continues to plod along while employment reports and global core inflation numbers suggest expansion not contraction.

While navigating through the present mine field of information, wrestling with the reasons on why U.S. bond yields deserve to be near historic lows or the stock market near historical highs, allow me to present some of the best investing knowledge I’ve gained after sorting through hundreds of pages of estimations, predictions, and other severely off-beam conclusions.  The challenge for investors is always the wisdom in the answer – not simply the answer.

  • Financial analysts, economists, and the like have the choice, the prerogative to stop their research once they have the desired result.  The pressure of being correct or having a “good answer” preys on the insecurities lurking deep within an industry professional, beckoning them to the false sanctuary of what everyone else is doing.  Most of us can make a solid case for the market going either up or down.  It is otherwise known as data-fitting and once the data fits, your conclusion is gotten.
  • Observing facts we must ask why they are considered significant.  Imagine an external market event strike; panic grips the system which, in consequence, seizes.  Yet the triggering event is, with reflection, found to have been rather modest and little to do with the facts splashed on the front page of the financial newspaper.  We base our investment theses on facts we think are important and yet the market is usually indifferent.  And with that observation you wind up with facts exhibiting both greater complexity and less diversity.
  • Facts are what we have to reckon with whether we like them or not.  Values are what we choose because we want them.  The present facts suggest a market rally centered on a yield-driven expansion in multiples, a solid earnings season, vigorous consumer spending numbers, two blow-out ISM reports, and the most recent sturdy jobs data.  I don’t dispute the facts but I similarly don’t see the value in the facts as earnings assumptions and general yield complacency leaves the market very little margin for error.  Similarly, I don’t deny the facts but I can and have found better investing value elsewhere beyond the U.S. equity market.
  • Are you looking for what you know or for what you don’t know?  One of the craziest afflictions I know of is our faith in our ability to see the future; it is a direct result of our fascination with the familiar.  A personal example from March, 2011 when gold was still eight months away from making its all-time high, “Many things have gone right for gold this year but the rally appears most easily explained by changes in key U.S. financial variables. As such while further gains are possible, gold remains highly vulnerable to any shift in macro-sentiment.”  Good writing but it surely isn’t risky – it’s being in a dark room and knowing exactly where the light switch is.
  • The collection of information gives one the illusion of wisdom.  We are far better informed than we’ve ever been; but read not for information but formation.  We cannot understand even the beginnings of any market cycle without knowing something of the environment to which it came.  Thus, we are subtly drawn to the advice of economists, bankers, and financial analysts, as their words portend a false illusion of control.  Investors need to stop the enjoyment of being treated as mere customers.  Markets live in the lap of enormous wonder and the simple consumption of information turns investors into cognitive machines.  Read to gain wisdom and insight as the comfort principles of others should never drive your investment decisions.