Terry Sawchuk Founder & Chairman
There is an old investment adage: don’t fight the tape. Since ticker tape machines have gone the way of the dinosaur one could suggest that the newer version of this adage would be: the trend is your friend.
The recent stock market trend is obviously heading up. The record high on the DJIA is evidence. This record happened in spite of the sequester cuts taking effect that very same week. The market has recently been ignoring the bad news. The potential road blocks to an increasing stock market over the past few months include:
- Fiscal Cliff
- Debt Ceiling
- Italian Election
- Continued higher than desired unemployment
- Mayan Calendar calling for the end of the world
- Dysfunction in Congress
- Growing national debt
- Fear of inflation, even hyperinflation
- Willingness of the Federal Reserve to keep the printing presses running
To be honest, it is the last item on the list that is not really as much of a road block as it is a catalyst. The Fed has been, in our opinion, the single biggest reason why the stock market continues to reach new highs. You could argue that: the economy is improving, the housing market is getting stronger, auto sales have been gaining and consumer spending is on the rise. While all of this is true, we would ask 1 simple question. Is the economy in better shape today or Oct of 2007 when the DJIA reached its highest level until this week? We would argue that things are not as good today as they were back in 2007. There are more complexities to this statement but, the simple reason the stock market is as high as it is today is due to Fed policy.
Many of us would like to think that the markets are overbought, a correction is coming, hyperinflation is on the way, or the growing debt will crush us. The real question is when. It is hard to argue that down the road our economy and stock market will have to face these issues. Will this be in 3 weeks, 3 months or 3 years? Only time will tell but at this point, it seems clear that Fed policy is not going to change in the very near term. The low interest rate environment has several influences on stock prices, all of which should keep the markets moving higher.
The algorithm that we currently employ helps to filter out all of this unwanted noise and focuses on trends. We must all remember that, the trend is your friend. At some point in time the trend will change and we will be ready to change the investment allocation. Until that point in time, don’t fight the tape.
Visit www.sawchukwealth.com to review past issues of The Marketview.
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