5 Experts Sort Out This ‘Weird,’ Crazy Market

by Jeff Reeves | August 10, 2012 11:13 am

Economic indicators are mixed, Europe alternates between a debt deal and a disaster … and we still have a presidential election on the horizon!

CNBC commentator Herb Greenburg perhaps put it best with the headline to a column this week, “Why Does this Market Feel Weird?”[1]

Greenburg cites Phil Pearlman, executive editor of StockTwits, as saying, “You’ve had 12 years of poor market action. Even the hedgies can’t get it right. You have seen mutual fund outflows for so long … The world and the market have grown infinitely more complex and perception follows price.”

I’ve been chatting about these columns with several colleagues and wanted to share some of our thoughts with you. Feel free to spout off your own feelings in the comment section below, or hit me up on Twitter at @JeffReevesIP[2] to continue the conversation.

Without further ado, here’s some more big-picture philosophy from a few market-watchers on why Wall Street just feels, as Herb so succinctly put it, “weird.”

No Patience, So No Recovery

I think the “weirdness” comes from the fact that investors, politicians and consumers have no grasp of history and no patience.

The financial crisis obliterated many jobs, businesses, retirement accounts and (silly as it sounds) dreams. It was arguably the worst crash since the Great Depression, and won’t be fixed overnight. However, we are ill-equipped to handle the rebuilding and recovery from this crisis because of our “now” mind-set.

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As 21st-century humans, we demand high-speed downloads, overnight mail and instant gratification. But now more than ever we need patience and perseverance to get through this mess. Just look at this ugly chart from Bill McBride at the blog, Calculated Risk[3].

A great nugget I found on The Reformed Broker[4] references an Edward Jones and Opinion Research study that pretty much shows Americans feel a need to do something — anything! — to figure out this market. This despite study after study shows investors trade too much and hurt themselves by overthinking.

Investors can’t unplug the need for instant progress, even when it’s not possible. Thus the gradual growth in jobs, home prices and stock valuations shorts out their brains. Is it a recovery or is it a pending crash?

It’s like a thermostat with two settings — 45 and 95. Rather than be lukewarm, investors and consumers and businesses instead feel the need to keep cranking between the two settings.

It’s nearly impossible to get comfortable in that kind of household. And frankly, it’s only a matter of time before the A/C switches on and this red-hot rally gets put on ice.

Jeff Reeves, InvestorPlace Editor

Anything Can — and Will — Happen

The S&P 500 is up 11% year-to-date and just one big push away from surmounting its bull-market high, but I don’t buy it.

I have to agree with my colleague Jeff Reeves — there’s no sense in making any moves at least until after the election[5], and probably not until Thanksgiving. Yes, a run like we’ve had so far this year would be great news for an entire year in any year. Hell, a steady 11% annual gain doubles your money almost every six years.

But it’s hard to have much confidence in the market’s low-volume rally. Is the outlook for economic or corporate earnings growth really 11% better now than it was on Dec. 30, 2011? No. GDP forecasts for the U.S., Europe, China, Brazil, India — you name it — are lower now than they were at the start of the year. And so are corporate profit forecasts, the ultimate driver of share prices. Meanwhile, with the exception of housing[6], most of the data is softening.

Oh, and no one knows what his or her marginal tax rate will be next year.

Staying frosty with defensive dividend payers looks good here, and I wouldn’t be surprised to see the bond market keep chugging along, with the yield on the 30-year Treasury closing in on 2% (It’s at 2.78% now). Think it can’t happen? Tell it to the Germans or the Japanese, whose 30-year government debt throws off 2.27% and 1.86%, respectively.

— Dan Burrows, InvestorPlace feature writer

Old News Is Good News?

The aspect of this market I find most puzzling is that it keeps reacting to information that should have been factored into prices months or even years ago. If you pick up a newspaper from any time in 2011, the main preoccupations driving market volatility were “macro” worries coming out of Europe. If you pick up a newspaper from any time this year, you’re going to see the exact same headlines, and you’re going to see the market reacting the exact same way.

I am no believer in the “efficient market hypothesis.” In fact, I believe the theory to be the single-worst development in the history of investment management profession. But that said, efficient markets or not, it shouldn’t take two years for the same macro headlines to get factored into prices.

Something has changed with investor psychology as well. I pretty much have to wrestle my clients to the ground to get them to put money in the market these days. There just is no tolerance for risk and a general feeling that the market is rigged against them. I understand completely, of course. But their risk aversion has gotten to the point where it’s bleeding over into risk-seeking behavior without even realizing it. Buying bonds or leaving investable funds in cash is virtually guaranteed to lose money after inflation.

My advice is to load up on quality names paying a decent dividend and wait it out. You might be waiting for a while, but at least you’re getting paid.

— Charles Sizemore, Editor of the Sizemore Investment Letter[7]

Death by a Thousand Cuts

I think the real question worth asking is a bigger-picture one. The market rut is not something that happened all of a sudden.

Contrary to assumptions, it’s not indecision surrounding the crisis in Europe, nor is it tepid earnings growth for Q2[8], nor is it a slowdown in China, nor is it disgust with the fallout from a botched high-frequency trading program that’s sapping stocks now.

What’s driving investors to the sidelines in the middle of 2012 is three straight years’ worth of similar setbacks.

Some examples include the U.S. debt-downgrade or the nuclear disaster in Japan or the oil spill in the Gulf of Mexico or military action in the Middle East that doesn’t always seem to have an endpoint … you get the idea. The market has been pretty resilient so far, but each setback leaves investors a little less enthused, and it’s only now that the cumulative effect of those headaches has taken enough of a toll. The market’s fading volume since 2008 jives with the idea.

In other words, stocks look and feel listless right now because genuine interest and faith (aside from short-term traders) in the market is about as weak as we’ve seen it in the modern era. And who can blame the average ma-and-pa investor? So-called “black swan” events are now (ironically) the norm.

Why play with fire after being repeatedly burned?

— James Brumley, InvestorPlace writer

Long Term, You Learn to Live with the Craziness

I have to admit that I am baffled by the markets. Nothing appears as it should be: Rumors of European meltdown persist, although they’ve taken a sabbatical to watch the Summer Olympics. Robot trading has replaced robo-signing as a sign of the droid apocalypse we all fear[9]. And the U.S. economy either “is” or “isn’t” recovering/dying, depending on which report you read.

And yet the market continues to rise, albeit slowly and with the occasional fit and start, and for the most part corporate earnings are grinding along with improved numbers and outlooks. Dividends get increased, and I sense people are a little bit more sanguine as opposed to resigned when it comes to the market’s future.

We are all either nuts or just resilient. Individual traders in particular are made up of a lot of hardy types who for the most part want to take their time with information, listen and analyze, and make a move. In other words: They invest.

The trading machines on Wall Street might rule the world on a daily microsecond moment, but human investors keep trading and reading about the market. That was true yesterday, true today and will be true tomorrow.

We are in it for the long term, and to do that, we have to stick it out, stay with it and just live with the bafflement at all times.

So count me in.

— Marc Bastow, InvestorPlace.com Assistant Editor

Do you have any strong feelings on why this market is the way it is right now, and what is to come? We’d love to hear from you. Add a comment below, write us at editor@investorplace.com[10] or join the conversation on Twitter with me @JeffReevesIP[2].

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[11]

  1. “Why Does this Market Feel Weird?”: http://www.cnbc.com/id/48571810
  2. @JeffReevesIP: https://twitter.com/JeffReevesIP
  3. from Bill McBride at the blog, Calculated Risk: http://www.calculatedriskblog.com/2012/08/july-employment-report-163000-jobs-83.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29
  4. The Reformed Broker: http://www.thereformedbroker.com/2012/08/09/hurry-up-do-something/?utm_source=dlvr.it&utm_medium=twitter
  5. there’s no sense in making any moves at least until after the election: https://investorplace.com/2012/07/7-reasons-to-stop-trading-until-thanksgiving/
  6. with the exception of housing: https://investorplace.com/2012/08/housing-comeback-creates-an-xhb-play/
  7. Sizemore Investment Letter: http://www.sizemoreletter.com/
  8. tepid earnings growth for Q2: https://investorplace.com/2012/07/corporate-profit-streak-is-at-risk-on-outlooks/
  9. droid apocalypse we all fear: https://investorplace.com/2012/07/the-4-horsemen-of-the-high-tech-apocalypse-aapl-amzn-ibm-si/
  10. editor@investorplace.com: mailto:editor@investorplace.com
  11. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb

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