The more critical directional fundamentals -- growth of monetary liquidity, near zero short
rates and confidence -- remain positive for the market (Confidence is reflected in the trends
of narrowing credit quality spreads and a rising p/e ratio). My broad measure of money +
credit funding growth has exceeded the demands of the real economy, thus leaving excess
system liquidity to flow into the current favorites of equities and housing. A substantial loss
of earnings growth momentum has yet to significantly inhibit the market's advance and a
rising oil price has so far been well accommodated.
My weekly cyclical fundamental indicator has regained positive traction in both forward
looking and coincident categories, but a degree of caution is still advisable given the scant
growth of consumer and business incomes.
The Fed is keeping its large QE 3 program in place for now, but It is harassing the market
with threats of curtailing and eventually zeroing out this effort if the economy can show
sustainably faster growth. The specter of winding down QE does seem aimed at inhibiting
speculation in stocks.
Below par cyclical inflation does provide theoretical support to the market's p/e ratio of
16x+, but the market is tending toward full value as earnings progress remains subdued.
The President and the Congress have another circus planned for just ahead with the
rebellious right wing of the GOP so far unwilling to vote out clean budget and debt ceiling
bills and with Obama prepared to veto what is on the table now. Because the major players
are more coldly angry now, it would not be a surprise to see stocks become more volatile
in the weeks coming up. However, since the players may put more cards on the table by
the end of the forthcoming week, it is still early for strong pessimism. This is ugly stuff
with a heavy undercurrent of race coming from the right.
The strong advance in the stock market throughout 2013 to date has so far been a winning
hand in an against-the-house bet on technical grounds and the heavily overbought nature
of the market since May has yet to produce the odds-on deeper correction that big time
overboughts generally set up. SPX Weekly Chart
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!