While Everything Else Is Crumbling, Commodities Are Getting Stronger
Today's economic climate is helping these markets.
Reminiscing about March 2009 should jog investors' memories enough to realize that our economic and market structure may never be the same. Investors who believe the worst is in the rearview mirror might need to refocus on the road that brought us to this point and look over their shoulders a bit to check the blind spots.
It may be time to look past the recent bullish correction, examine the underlying condition in the market, and start looking through the front windshield.
Unfortunately, the global economy is currently in the position of giving history permission to repeat itself, again.
The market pendulum may swing either way coming into the end of the year and investors need to understand how to dig in their feet, take a stand, and defend their portfolio.
Currently, the fundamentals of a secular bull market don't exist.
There are three factors that have been apparent in every secular bull market in recorded history: Expanding P/Es, growth to top-line production (i.e. revenue growth), and interest rates that are declining.
Without these three present, the rallies in the market have all fallen short as bull rallies in a secular bear market.
Currently the average P/E for an S&P 500 company is just about touching 18, which is approaching the danger zone where investors tend to start backing off.
It is difficult to commit money to a market for future earnings when the current earnings are already elevated, which is essentially what one is doing when investing.
Currently, there are very few companies that have actually been experiencing revenue growth. From the financial industry to the tech sector -- and everywhere in between – write-offs were the trend in 2009. Toxic debt was cast aside and taken off corporate balance sheets, workforces have been cut, and many industries have consolidated.
Not be left out are the bastion of small businesses that have gone under because they could no longer get financing to front their inventory and the consumers whose confidence changes with the wind.
These aren't typically the things that lend an economy to growth, expansion, or recovery.
Taking a macro-economic view, it's almost impossible for top line production to expand unless output is increasing, which isn't the case.
Look back to 1983 and something interesting happened -- the market entered into a secular bull cycle while unemployment was high.
Many pundits supporting the recent rally reference this phenomenon and hope to find a correlation between then and now.
However, there are key elements missing today that should have a different impact on the direction of the market.
In the 1970s there was hyperinflation in the United States and Fed Chairman Volcker's only choice to combat it was to raise interest rates to curb it. After peaking at more than 20%, the interest rates began to fall, companies began to grow, and P/E ratios were expanding from an average of about eight times earnings.
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