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Two back to back near 10% declines
and Nasdaq keeps going and going and going...!
The question is, for how much longer? It used to
be that after three interest rate increases the
market stumbled-now we are on the forth, with no signs
of abatement- Of course this "new paradigm"
market has consistently defied many of the old rules,
so, why shouldn't defied this one as well? First of all
we would like to opine that we believe stocks that are
expected to grow 40%-50% a year for the next 3-5 years
do not really get impacted by 100 basis points increase
in rates over 9 months, neither does an economy as
strong and resilient as the U.S economy has been in
recent years. Therefore it should not be a surprise that
a)the market rallied against rising interest rates since
May,b) the economy has continued to grow and c)
investors have come to expect more of the same. That is
where we have some reservations. We do believe that the
stock market has a major "wealth effect" in
the economy, it has fueled not only consumer spending
but also the housing market, which both in turn, have
fueled more economic growth. It is our opinion, that if
the FED really wants to slow down the economy it would
have to slow down the stock market. It is naive to think
otherwise. The question then becomes how much do
interest rates have to increase for market participants
to really pay attention? Honestly, in this "new
paradigm" market we do not know. What we do know,
is that interest rates and the economy can not move in
tandem indefinitely! At some point one or the other has
to give. Assuming, that the FED is serious about slowing
down the economy, then, if we further hypothesise that
the economy does slow downwhat would that do to
corporate profits? In the "Old Economy" when
it slowed down it meant reduced corporate profits. Maybe
we have managed to repudiate this phenomenon as well,
however we will not bet "the farm" or should
we say "we will not bet the house", meaning we
won't take a "second" on the house to buy
high-tech and internet stocks on margin! In addition, we
believe that technology is cyclical as well. If the
economy was to slow down meaningfully, then corporate
profits would undeniably suffer, and along with them
some of the high-flying stocks with stratospheric P/Es.
Is the economy going to slow down meaningfully? Again,
we honestly do not know. Does the FED want to risk a
recession in the middle of an election year? Probably
not. Is inflation going to spiral upwards if the economy
does not slow down? At some point it will, maybe not
now, but if the economy keeps adding 700,000 jobs every
two months -like it did the past two months-
inflation due to wage increases is inevitable. So, what
is our point? Our point is, we may be at a very critical
junction which the rules may change. For example, buying
the dips may not work any more, who knows? We believe,
that investors should be on alert and they should not
get too comfortable, just in case we finally have
reached a point where "Old Economy" curses
such as inflation, slow growth, rising short-term
interest rates etc., might revisit us. Are we predicting
any of the above will certainly happen? No, but the
warning signs are there. Consumer confidence is at an
old time high, unemployment is at 4.00% , this month
marks the longest economic expansion since WWII, margin
debt is at record high, the CRB index is rising,
investors sentiment is wildly bullish etc,etc. We think
is prudent to keep al the above in mind and not
"bet the house!" on the market.
Our
Market Positions:
Neutral
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AEGEANCAPITAL
GROUP INC.