The Market is Rallying – Why Again?

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Markets have begun to rally around the globe, perhaps signalling an end to the volatile beginning of the year. The mood has definitely lightened and there seems to be some broad support for a return of some positive numbers across the board.

But if we stop to ask ourselves why, we may be left scratching our heads at the answer. The current list of issues affecting the global economy is pretty long. China’s slowdown, the demand destruction for oil, problems across multiple oil and commodity producing nations, financial instability and an almost unbelievable amount of debt. In fact the the market turmoil has a lot of justification, far more than some of the previous sudden corrections over the last two years.

So what’s changed? Three things. First, central bankers have recommitted themselves to doing whatever it takes to put the economy back on a path to growth. Second, a deal has been announced with Russia and Saudi Arabia to cap oil production. Third, a growing concern about the financial assets of Deutsche Bank have been “put to rest” as it were by the German government.

As a list of reasons to be excited, I’m left somewhat underwhelmed. Take the deal between Russia and Saudi Arabia. The larger promise of this deal is that is spells out potential future moves to get oil prices back to a level of sustainability. For right now it simply outlines capping oil production at January levels, but will be largely meaningless if Iraq and Iran can’t be brought into the deal. Iraq and Iran for their part aren’t really interested. Iran, who isn’t exactly friendly with Saudi Arabia, has just got back into the global oil market and is looking to ramp up production. Iraq is also increasing it’s oil production, helping bring much needed funds to a country that is still looking to stabiles and legitimize itself. Neither are particularly interested in following Saudi Arabia’s lead.

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It would at least mean more however if the January production numbers reflected some kind of wide ranging reduction in oil output, but among OPEC nations, as well as the United States and even Canada, oil production has continued to increase despite the price drop.

What about the central bankers promising to use all their muscle (and some that we didn’t know they had) to save the economies of the planet and return economic growth? Having spent the last eight years with emergency level key interest rates and very little to show for it the only solution is to go to a negative interest rate. Earlier in 2015, Stephen Poloz suggested that negative interest rates were a possibility for Canada. Much of Europe already has negative interest rates. Japan surprised markets a few weeks ago by making their key interest rate negative. Last week Janet Yellen, head of the Federal Reserve, also said that negative rates were not “off the table.” Disturbingly, having interest rates as close to zero as possible hasn’t encouraged wide ranging inflation across developed economies. Obviously the only solution is more of the same but SAID LOUDER AND MORE CLEARLY.

Here is Christian Bale yelling at you to spend some of your money!

But possibly the least exciting of the exciting news is surrounding Deutsche Bank. Last week Deutsche Bank seemed to be cruising towards the unenviable title of “the next Lehman Brothers”, before the German government “encouraged” the the market with some supportive words around the stability of the bank; a coded signal that Deutsche Bank is both “too big to fail” and that the German taxpayer would be on the hook.

Deutsche Bank’s problems have been extensively catalogued. Between massive fines, massive losses, massive layoffs, and a massive derivative position currently in excess of $50 Trillion (yes, with a “t”) the potential for the world’s fourth biggest bank to implode and set of some kind of financial (and given it’s position within Europe, political) cascade effect is very real, even if they do get a bailout.

On top of all that is the regular bad news that we haven’t addressed. China’s liability is still unknown, and as it hemorrhages foreign currency reserves threatens yet another line of attack against markets. Venezuela may, or may not, default on it’s debt. Here at home provinces like Ontario would have at least been hoped that a combined falling dollar and oil price would start bringing new manufacturing within our borders, instead they must brace for the disappointing news that of three new auto plants for North America, we will get none.

Some people may be excited about the most recent rally, but I’m afraid I’m not one of them.

How Imminent is the Next Market Crash?

image001This past week I received an article from a client regarding ideas about “wealth preservation” that made some good sense, and offered advice about calculating how much money you need for retirement. But while the premise was sound; that it makes sense to pursue investment strategies that protect your nest egg when your financial needs are already met, a one off comment about the future of the stock market caught my attention.

You can read the article HERE, but the issue I wanted to look at was the not so subtle implication that the US markets were now due for a correction. A serious one. Quoting the Wall Street Journal contributing writer William J. Berstein,

“In March, the current bull market will be six years old. It might run an additional six years—or end in April.”

This isn’t the first time I’ve heard this point before. It isn’t unique and sits on top of many other market predictioner’s tools, but its use of averages gives a veneer of knowledge the writer simply doesn’t possess.

Obviously we would all like to know when a market correction is due, and it would be great to know how to sidestep the kind of volatility that sets our retirement savings back. But despite mountains of data, some of the most sophisticated computers, university professors, mathematicians and portfolio managers have yet to crack any pattern or code that would reveal when a market correction or crash should be expected.

Which is why we still rely on rules of thumb like the one mentioned above. Is the age of a bull market a good indication of when we will have a correction? Probably not as good of one as the writer intends. Counting since 1871, the average duration of a bull market is around 4.5 years, making the current bull run old. But averages are misleading. For instance the bull markets that started in 1975, and 1988 (ending in 1987 and 2000 respectively) lasted for 153 months each, or just shy of 13 years. Those markets are outliers in the history of bull markets, but their inclusion in factoring the average duration of the bull markets extends the average by an additional year. Interestingly if you only count bull markets since the end of the second world war the average length is just over 8 years, but that would only matter if you think our modern economy has significant differences from an economy that relied on sailing vessels and horses.

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The fact is that the average age of bull markets is only that, an average. It has little bearing on WHY a bull market comes to an end. There was nothing about the age of the bull market in the 2000s, when people had become convinced of some shaky ideas about internet companies that make no money, that had any bearing on its end. The bull market that ended in 2008 had more to do with some weird ideas people had about lending money to people who couldn’t pay it back than it did with a built in expiration date. Even more importantly, the market correction of 1987 (Black Monday) was an interruption in what was an otherwise quarter century of solid market gains.

Taking stabs at when a market correction will occur by using averages like duration sounds like mathematical and scientific rigour, but actually reveals very little about what drives and stops markets. And a quick survey of the world tells us a great deal more about global financial health and where potential opportunities for investment are than how long we’ve been the beneficiaries of positive market gains.