Definition of Stock market:
The market in which shares are issued and traded either through exchanges or over-the-counter markets. Also known as the equity market, it is one of the most vital areas of a market economy as it provides companies with access to capital and investors with a slice of ownership in the company and the potential of gains based on the company's future performance.
Sometimes, revisiting a known fact, helps us connect the dots differently and makes us think from a different dimension.
The stock market is composed of companies from several broad sectors of the economy, having different economic variables, different business cycles and influencing the entire population, directly or indirectly.
A stock market is actually supposed to act like a mirror of the underlying economy. If the economy is good, the markets reflect that optimism and if the economy is underperforming, the markets ought to reflect that too. That is how the system is designed to work.
With a hand placed on our hearts though, we feel sad for the people who thought that the above made sense and religiously stayed away from the US (and basically all) stock markets due to this understanding. They have basically lost out on one of the biggest bull runs in history.
The reason - Well !!! Markets are at lifetime highs, up almost 130% from their 2009 lows, makes high almost every day and are amazingly resilient. No bad news seems to be bad enough.
Corporate earnings disappointing? Ah well you can ignore it.
Interest rates rising? Employment numbers coming in terrible shape? No problem.
Treasury yields and oil prices going up? No buddy, i don’t care. Let’s buy some more stocks.
As we said, nothing, absolutely nothing seems to trouble the markets at this point in time.
We ask this question to ourselves? What should happen to the markets (already sitting at lifetime highs), when the employment numbers come in weak, underpinning the fears that the recovery in the already fragile economy is on a weak footing? Well a high school student will tell you that the stock markets should fall to reflect that fear and the possible future impact.
Just check out what happened yesterday (Click Here).
The July jobs report published by US Bureau of Labour Statistics was disappointing in all aspects and indicated a huge increase in part-time jobs, as opposed to the full-time jobs which the economy actually needs. And the result? All three indices, Dow Jones Industrial Average, NASDAQ composite and S&P 500 closed at their fresh lifetime highs.
Just hold on for a minute. What is exactly happening? Is the market irrational or are we missing something here?
Yes, we are missing the music from the Bagpiper man - The US Fed. The situation is akin to a circus where not only the animals in the cage, but the entire audience is dancing to the tunes of the ringmaster. Thanks to this ringmaster and his enormous money pumping arrangement, the markets are now hopelessly addicted to the cheap liquidity and are completely disconnected from the fundamentals which are supposed to drive them. Investors today don’t invest based on what the management of the companies say or what the micro and macro economic fundamentals indicate. Instead they base their investments on what the US Fed says. Slightest of rumours of Fed discontinuing or reducing its dollar splurging spree, knocks the wind out of the markets. Fed is the new game in town. In fact, Fed is now the only game in the town.
What really happened yesterday was that with the jobs report coming in weak, the markets projected that the possibility of Fed curtailing its bond buying program, gets pushed further into the future. consequently, new money poured in, to take the markets to new highs. We are now in a time, when markets bleed on good economic data and move up on bad economic data.
But dear readers, the music from the Fed will have to stop some day. The trouble is already visible on the horizon with the treasury yields shooting higher despite the presence of Fed. The era of ultra cheap interest rates is about to get over. Getting in the markets now is extremely risky. Markets may very well move up from here, but the risk which has built up in the system does not justify those possible gains.
In our view, investors should gradually move their money out of the stock markets and into fixed income securities.
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