Jim Cramer, host of MAD Money on CNBC, has a problem. The sound-effects specialist and equal-opportunity stock mocker has noticed a compelling trend on Wall Street. It seems those stocks and sectors that tend to do well in a recovery are declining, even as those which advance amid slowdowns are attracting capital. The cantankerous Mr. Cramer has finally tripped over the tip of the iceberg.
Today we have two contrasting metrics. One the one hand, a recent Forbes survey of asset managers showed that a majority believe that Janet Yellen’s Fed will be unable to fully taper their purchases of mortgage-backed securities until the third quarter of 2014. Given what QE3 has done for our markets — if not our economy and jobs — they assume a beneficial environment for stocks could continue well into next year. This is reinforced by a survey of leading advisers whose equity exposure currently stands at a whopping 93.8 percent — tied for the highest it’s been in many years, as well as another study that predicts this bullishness could be vulnerable to a mild correction lasting little more than a month, perhaps three, after which investors are likely to recover those losses, reapply their rose-colored glasses, and resume their profitability. There is even a rising chorus arguing that the Yellen Fed should reduce its unemployment target to 6, even 5½ percent, before beginning to taper its $85 billion in monthly purchases of mortgage-backed securities, an announcement that would clearly cheer U.S. markets well into next year.
But never mind the markets; what about the economy? In a recent post, I asked a basic question, restated here with updated numbers: “With the economy barely growing at 2 percent, how is it possible for the 500 companies that supposedly represent that economy (the S&P 500) to already be up 23 percent year-to-date—seemingly with no end in sight?” As Wall Street Journal columnist Brett Arends recently pointed out on MarketWatch.com, such a disconnect is only possible amid “Irrational Exuberance 3.0,” a return to the giddy, devil-may-care euphoria of the late 90s dotcom bubble, revived with updates for your investing enjoyment by a Federal Reserve oblivious to the wide-ranging side-effects of its folly on our posterity.
In the last month, we’ve seen unemployment decrease slightly (largely because discouraged seekers stopped looking), even while the Labor Participation Rate worsened. The National U.S. Retail Federation just predicted the weakest holiday sales in five years, not a good sign for businesses that make 80 percent of their annual revenue in the last six weeks of the year. Additionally, the Conference Board just released its latest consumer confidence numbers hitch dropped markedly from 80.2 to 71.2, the lowest reading in six months.
And finally, if you thought our recent budget and debt-ceiling impasses in Washington were behind us, think again. All Congress did last month was defer the budget conversation to January, and postpone the debt ceiling debate into February, leading Wells Fargo Securities to warn, “Given that the latest fiscal policy deal only (postpones the debate) until January, we expect consumer confidence to take another hit to start the new year …and ongoing political disagreement to pose downside risks over the next couple of quarters.”
In a truly frightening sign of the Fed having now enabled the gamblers, margin debt, the amount of money investors have borrowed to invest in the market, recently hit record highs. According to a columnist at seekingalpha.com, (See: 5 Reasons Why You Should Sell Stocks Into This Fed-Induced Market Bubble), “…In September 2013, margin debt stood at $401 billion, which is even higher than where it was before the financial crisis at $381 billion. This 2007 peak in margin debt came just 3 months before the S&P 500 hit an all-time high and then collapsed in the aftermath of the Financial Crisis. Record levels of margin debt are another sign of pervasive greed in the market and the lack of fear which often come at market tops.” (emphasis added)
Sooner or later, the exuberance of the market has to bear some connection to the malaise of our domestic economy. If you haven’t benefited from this euphoria thus far, now may not be the time to come late to the party. And if you have, it may be time to head home before our beloved but ever more tipsy host stumbles embarrassingly into the pool.
Thomas K. Brueckner
President & Chief Executive Officer