Update on the Mood of the Stock Market

Sorry to have been incognito for the last several days, but there just has not been much in the news worth commenting upon.  Additionally, I just have not sensed a change in the mood of the investment community’s collective consciousness.

For today’s post, I am going to repeat a question that came from the comments section of the blog as a way of addressing that enduring question, “what’s the mood of the stock market?”

Here’s the question:

“Jason,
“You are astute as ever and I have very much benefitted from your most recent comments. Do I take it that you do not exactly sense the “confidence” feel that you say you seek (or do I have that wrong?) but that you counterintuitively deduce that since those who remain invested want to be right there, that the market does not have a huge slide ahead? Would you please comment on whether the market panic we have seen can in effect help generate a recession that might not otherwise have been triggered?
“Thanks a million!
“Patricia”

The interpretation of my post, “Have the Financial Markets Turned Up?” by the commenter is exactly right.  In my analyses I always use a combination of fact-based analysis and intuition based analysis.  The combination of the two is more potent than the two investment tools operating in isolation.

Right now, what are the facts?

• The U.S. economy has not yet righted itself since the Great Recession.  Yes, on a gross domestic product (GDP) based evaluation the U.S. has exceeded the peak economic output of the pre-Great Recession period.  So here I am talking about:
  • The unemployment rate remains stubbornly high
  • In turn, this causes consumers to maintain a bunker mentality where they save money and spend it carefully
  • In turn, this causes a diminished revenue growth outlook for businesses
  • In turn, this causes businesses to keep their expenses low in order to maintain profitability
  • This means that businesses, like consumers, are saving money and spending it carefully
  • In turn, the unemployment rate remains stubbornly high
• Governments around the world since late 2008 have applied massive, unprecedented stimulus to prop up their economies.  While these policies could be lauded or decried, the fact is that there is no control case to evaluate, so every scenario but the one that unfolded is speculation.
  • The stimulus so far has not returned the world economy to pre-Great Recession psychological stability and health
  • Stimulus was funded, not with excess resources held by governments, but by borrowing against the future value of each government’s economy – so massive amounts of debt have been accrued without increasing the size of the economy to the degree where incomes increase, leading to increased tax receipts, leading to an increased ability to pay off the debts
  • This has led to a crisis of confidence on the part of investors as to the health of the First World’s government finances
• Businesses continue to do well in the post pre-Great Recession environment
  • Many businesses are reporting record levels of absolute profitability (i.e. profits as measured by the dollar amount, if not the profit margin amount)
  • Many businesses are also nervous about the economy and have held back spending on new revenue generating projects

These facts lead to a natural bifurcated question: what is more important to evaluate right now, the facts or the psychology of the collective consciousness?

I think that you would agree with me that at this moment the psychology is the more important thing to focus on right now.  So what is the mood of the market?

• It still feels as if there is not enough of a unified flow amongst the various economic constituents.
  • Most consumers are in a wartime mentality.  This is a healthy response to the conditions present.  The unemployment situation is not improving, but neither is it worsening.  Employers have asked, and will continue to ask, a lot from their employees.  Longer hours for the same pay.  More responsibility for the same pay.  Government has proven that its primary interest is not the people, but their own personal power as demonstrated by the inability of the major two U.S. parties to think as Americans first, and as representatives of a political party, second.  So consumers are steady and the most unified of the economic constituents.
  • Investors are torn.  Some are focused on the facts of the situation: the U.S. and Europe have been through an acid test of tremendous proportions over the last three years.  Everything that could go wrong has gone wrong and the various nations and their people have survived.  But then there are investors who deeply fear that things could get much worse from here, that the specter of another Great Depression is a real possibility.  These two groups are playing tug of war with each other and not unified at all.
  • Governments are unable to acknowledge their own shortcomings and their own possibility for noble action.  Instead they seem to be fighting for a greater portion of the pie, a pie that they see rapidly shrinking, rather than fighting to increase the size of the pie.  This impotency is what I feel is the driving factor behind the fear felt by the group of fearful investors.  Generations of investors have been trained in economic theory that says that in times of need governments are the backstop and guarantor of the economy (i.e. Keynsian economic theory).  But governments are on the verge of failing.  Not only that, but their method for safeguarding the economy – increased government spending – seems not to have restored the economy to its footing.  Unified is the least likely adverb to be used to describe the governments of the First World right now.
  • Businesses are close to unified.  Most feel that the environment is stable, but with a negative outlook.  Businesses are confident in their deleveraged balance sheets, comfortable profitability, and head count levels.  But they are lacking in confidence as to the next 18-24 month economic outlook.  They also see government as being in a protracted period of irrelevance except to the degree that it can serve as a nuisance.  Yet, some businesses are taking advantage of this period by investing when prices for assets that they covet are low and stably low.

Taken together, the above situation has resulted in a general sense of instability.  Ironically, back in March of 2009 when it felt as if the world was in free fall and in danger of economically returning to the stone age, there was unification.  The unifying belief as 9 March, 2009 came to a close was that the situation had to be abandoned and run away from as fast as was possible.  Most didn’t want to be invested in the financial markets, most didn’t want to go to work, most didn’t want to watch the stream of bad news on television or the Internet, and so forth.  But there was unification.

Post 11 September, 2001 there was also unification in the middle of potential catastrophe.  That unification was that everyone in the United States shared an event as citizens of the same nation.  Folks were unified in their shock and in their desire for some sort of action.  And that’s just it: united we stand, divided we fall.

I have been looking for some sort of unified mood for the collective consciousness of investors and it just hasn’t been there.  There are inklings of confidence, but there are equally strong inklings of panic.  Without some unification in mood the direction will remain what it is: volatile and sideways.

As to the question of whether or not the acid test that we have been through has led to a committed group of equity investors, I think so and I feel so.  But at the time of this blog posting the Dow Jones Industrial Average is down 455.73 points.  So those holding equities really did want to sell after all.  But lurking in the background I can also feel a number of investors – myself included – who are excitedly waiting for that moment when the focus of the market switches from emotions to facts.

By the way, I have about an 80% confidence level in my ability to intuit the mood of the financial markets.  But the volatility in my posts is generated by the extrapolation of what is likely to unfold based on that assessment.  To those uncomfortable with intuition as a tool this may sound like a cop out, but it is not.

Intuition is absolutely a powerful tool for discerning things like the mood of the financial markets.  However, intuition does not trump free will.  The actors, including you, all get a vote in future outcomes and that leads to volatility in the assessment.

Consistently for the last several months there has been a back and forth between those of confidence and those of little confidence and that continues to be the case.  If I were smart – and that remains to be seen in this unprecedented time – I would stop trying to extrapolate what is a likely future outcome based on the factual and intuitive analyses.  But then, I am trusting that you trust me to provide just this sort of forum for interpretation.

Imperfectly, but with integrity, yours!

Jason