The stock market exhibits resilience, scaling new heights despite numerous underlying risks. We face ongoing challenges such as the European debt crisis, a sluggish Chinese economy, and geopolitical tensions from Iran, raising questions about the sustainability of this upward trend. Shouldn’t investors gravitate toward the perceived safety of treasuries instead?
One would logically assume so. Nevertheless, the reality defies expectations; yields on ten-year treasury notes rose above 2 percent last Friday, marking their highest level in nearly a month. In parallel, the S&P 500 has surged by 20 percent since early October.
“Strong start for stocks, but what’s changed?” posed a Reuters headline over the weekend. “Will equities rally further?” inquired Credit Suisse analyst Andrew Garthwaite within that article.
Garthwaite predicts that the S&P 500 could reach 1,400 by year-end. However, he also cautioned about the potential for a severe recession in Europe and a slowdown in the United States.
So, the crucial question remains: will stocks continue their upward trajectory, or are we on the brink of an economic crisis that could crash the markets?
The answer to both questions appears to be a resounding yes. Thus, the age-old adage holds true, as Reuters reminds us—caveat emptor (let the buyer beware).
Is This the Right Time to Invest in Stocks?
This prevailing market uncertainty is particularly frustrating for small investors aiming to save for retirement. Many have experienced setbacks repeatedly over the past twelve years. Contrary to persistent assurances from their brokers, stocks do not always rise. In certain instances, a buy-and-hold strategy can prove detrimental.
Consequently, having sidelined themselves during the S&P 500’s recent 20 percent surge in favor of treasuries earning 2 percent, investors are now tempted back into the stock market. Will this step into higher-risk assets yield rewards or losses in the coming months?
Here at Economic Prism, we acknowledge we don’t have the definitive answer on how long this upward trend can persist—just like anyone else. Evaluating the European debt situation and the potential slowing of the Chinese economy paints a precarious picture. But there’s more to consider…
We are also confronted with the massive debt dilemma in the United States, an issue that seems to linger indefinitely. Investing in stocks during such turbulent times may appear reckless. Furthermore, if the objective is to buy low and sell high, isn’t purchasing stocks after a 20 percent surge counterproductive?
The answer, as you might expect, is yes—except when it isn’t. Let’s delve deeper into this conundrum…
Understanding the Stock Market
The seasoned investors often say that the market acts as a forward-looking entity. This implies that it generally anticipates economic shifts in both directions. To our surprise, the stock market has recently experienced substantial growth over the past three and a half months. Aligning with the wisdom of seasoned investors, we may now be witnessing improvements in the economy.
This week brings a flurry of corporate earnings reports, coupled with a mid-week Federal Reserve meeting. Additionally, Thursday will see the release of new home sales figures and durable goods orders. By Friday, the Commerce Department will unveil the fourth-quarter gross domestic product data.
Even if the week’s updates suggest a strengthening economy, it’s vital to approach with caution. We liken suffering financial losses in the stock market to enduring the discomfort of a root canal—something to be avoided at all costs. We would, quite frankly, prefer to miss out on a 20 percent gain than risk a 20 percent loss by buying into the market amidst a potential crisis. Simple mathematics backs this reasoning; losing 20 percent necessitates a 25 percent recovery just to break even.
The reality is that stock prices fluctuate, moving both up and down. Yet, at times, they can continue declining even further. What seems like the right moment to buy at one point may turn out to be completely misguided at another. Conversely, what appears to be a poor time to invest might actually prove to be ideal.
“The bulls managed to assert themselves, leaving the bears with little compelling news to influence the situation,” remarked Hayes Miller of Baring Asset Management Inc., after yesterday’s market close.
For stock traders, astrologers, chiropractors, and legislators alike, Miller’s insight provides a perfect simplification of a complex matter. For those of us who strive to think critically, this serves as powerful evidence that even in our modern, sophisticated society, the stock market can often be most effectively elucidated using animal metaphors.
Sincerely,
MN Gordon
for Economic Prism
