I was a little lost about what to say in this blog this week. I mean, how many times can you say the economy stinks, the stock market is overvalued, and conditions are ripe for gold? But the truth is nothing much has changed.
There was little new in the news this week, and what did appear, was basically the same old story. Fourth quarter GDP was revised upward again this week – this time to +.4%. You may recall the Fed’s first forecast estimated a contraction of -.1%. The first revision put it at +.1% last month. And while today’s 4th quarter GDP is 500% better than originally thought, forgive me for not getting excited about fractional growth.
A lot was made about the rise in February’s consumer spending, which at .7% beat what most economists expected. However, spending rose just .3% after inflation.
That stinks.
Even so, the Wall Street establishment applauded once again. The Dow Jones Industrial Average closed the first quarter up 11% – far surpassing the pace of GDP growth. Even the most overrated portfolio in the world, the S&P 500, closed at a new all-time high, and finally surpassed its October 2007 high on the last day of trading this quarter (March 28, 2013.)
As you know, the DJIA passed its ‘07 high-water mark more than three weeks ago, on March 5th. Stock market strength via the 15-51 Indicator regained its October 2007 high more than three years ago – on January 4, 2010. So now, some three weeks after the Dow and more than years after 15-51 Indicator, forgive me if I don’t see the S&P 500’s “record” as a big deal with any kind significance.
In the chart below, significance is not in the omission of the S&P 500 trend-line but the fact that the Dow has finally done something it hasn’t done since the ’08 crash – it reached Nominal GDP. (The 15-51 Indicator did that in August 2009.) See below.
Recent DJIA and S&P 500 milestones have led some people to mislabel the Market as “fully recovered” or to misconstrue lofty stock market prices as “validation” that recovery has actually occurred.
So not the case.
Recovery cannot begin until American government begins on a course of eliminating trillion dollar annual deficits. Until then, poor fiscal policy will continue to force poor monetary policy – both of which cause inflation.
To buy into this market is to buy into inflation – and that’s a risky proposition.
Corrections occur after prolonged periods of inflation; and they are not usually one-day events, but generally occur over the course of many weeks or several months. The correction’s behavior depends on the amount of inflation in “the market” and the severity of its impetus. The specifics, timing and/or behavioral, are not known by anyone. Nor is that information required to be successful in investing.
Discipline and your gut instincts are most valuable right now. You can’t succumb to your broker’s pitch, which can easily make you feel that you’ve missed something, or are in the process of missing something special. Heck, nothing irks your broker more than idle cash.
That’s why they manipulate the stock market and then use Dow 14,500 and the S&P 500’s recent milestone as advertising to lure your money back into their game. And while I know it could be difficult watching “the market” rise with perhaps a large portion of your money sitting on the sidelines, it’s definitely not prudent to buy into these lofty valuations. Think of all those people who bought into stocks in October 2007, when the Dow and S&P 500 were last at their current levels. It’s been a long time since they got back here.
Success is most easily had by investing in growth and the potential thereof (not inflation) and by buying low (when stock prices are down.)
If you’re thinking about buying into the stock market at these levels, think again. Inflation is prevalent, growth is non-existent, and market averages have been manipulated to all-time highs.
A correction is due.
Stay tuned…and let me know if you need help.