I don’t like to talk about any change of market direction by analyzing it for a two week period, but is there something for real here?
The same way I believe the “green shoots” are not all that valuable because one or two data points out of a 2 year downtrend does not tell that much, the markets starting to go slightly down and sideways for two weeks may just be noise. (Or the rally is just noise?)
Since the “March bottom”, there has been a big rally in the U.S. (and world) markets. Some people say it’s not sustainable and some claim that it is the end of the recession. Others say the gains in the markets will stay but we will have a choppy market that moves sideways (up and down with no change).
So, what to make of all of this?
First, is oil still going to break $100 and affect you at the pump? Oil has had a big rally due to the expectations of economic recovery, but with a weaker outlook, it could stay at this $70 level. You must take into account that if the dollar continues to depreciate, oil will go higher because oil is quoted in dollars. Therefore, that would be a currency effect and has nothing to do with supply and demand. Additionally, a lot of people claim that oil going past $60 has nothing to do with supply and demand but is rather just an effect from the depreciating dollar.
[Here is a link with a chart looking at the cost of an oil barrel in different currencies].
Is the recession over?
I don’t know. Nobody does. However, the people at the World Bank seem to have an opinion on the matter. Yesterday, this statement came out:
” The World Bank said the global recession this year will be deeper than it predicted in March and warned that a flight of capital from developing nations will swell the ranks of the poor and the unemployed.
The world economy will contract 2.9 percent, compared with a previous forecast of a 1.7 percent decline, the Washington- based lender said in a report today. Growth will be 2 percent next year, down from a 2.3 percent prediction, the bank said.”
[Link: Bloomberg]
So, we went from a prediction of -1.7% to -2.9%. I would not be surprised to see this number revised to -3.5% or so. Nevertheless, it seems like economic recovery is once again further than we thought. So, just because investors get hyper-happy and start buying like it’s a party again…it does not mean it’s a party again.
What about all that stimulus money?
It will probably help us and give a boost to economic recovery. However, $787 billion is a lot of money, but relative to the size of the economy it’s trying to boost, it will cost a lot and probably only make a dent.
More importantly, should you buy and hold?
Tough question. This depends a lot on your profile (age, risk appetite, etc) and what your outlook for the next 10? 20? 30? years is. The last ten years do not tell a good story. In the words of Jake from Econompic Data, it has been a “lost decade”.
As the chart below depicts, buy and hold and has not worked very well in the last 10 years: (Source: Econompic)
There are still 6 months left in the decade and the S&P 500 is still down some 28% for the decade. We need a 63.79% advance just to break-even for the decade. No wonder so many people are complaining that their 401(k)s are down the drain.
Overall, wait and see.
{ 1 trackback }
{ 0 comments… add one now }