In the
early stages of a bull market, the prospect of improving fundamentals down
the road provides the impetus to higher prices. In the latter stages of a
prolonged bull market, when the early prospects of improving fundamentals
have been fulfilled, the rally often continues on driven solely by
momentum and fear—fear not of a market decline, but rather a fear of the
consequences of nonparticipation.
As a trend winds its way higher, and
word of the easy money to be made spreads to the most remote outpost, the
crowd of followers grows, their faith in the sustainability of the present
environment becoming ever more deeply ingrained as the newly arrived money
propels prices higher, drawing in more money, creating a momentum driven
virtual circle that feeds on emotion rather than actual events.
It is perhaps no surprise then that as a
trend nears its grand finale, the ability of fundamental events to impact
the market decreases, and the ability of subtle blows to the crowd’s
perception of the sustainability of the trend itself to impact the market
increases.
Tuesday, one of those subtle blows to
the late bull market psyche struck, accomplishing that which the FOMC’s
interest rate hike last week was unable to do: produce jitters and create
doubts among the fans of the market’s highest flying stocks.
The bull market’s greatest
cheerleader, the pied piper of excessive valuations, sounded a cautionary
note on Tuesday when she lowered her recommended exposure to stocks from
70% to 65%, striking fear into the hearts of the many who have come to
believe 25% annual returns are an inalienable fact of life.
While Goldman Sachs recommended 65%
exposure to equities is still far above that of many of its competitors
and will not dislodge the firm from its place at the head of the
"This time it’s different" table, the slight shift in stance
was enough to spark a technology led market selloff, spooking many
investors who were suddenly forced to contemplate a concept that many
thought had ended with the coming of the New Era of wonder: the idea of
8%-10% annual returns from the stock market.
Although the impact of today’s jitter
producing shift in asset allocation will likely not extend beyond today,
today’s market reaction to the news did point out that at this stage of
the game it is a continuation of exuberant sentiment, rather than a
continuation of current fundamentals, that holds the key to the market’s
ability to remain at its current historically lofty levels.
Of course, shifts in the recommended
portfolio mix of an employee of a firm that stands to be a little less
golden if the current exuberance ebbs are not the only thing that can
cause a dip in the confidence of investors and consumers—rising oil
prices can also do the trick, as Tuesday’s release of the March Consumer
Confidence numbers from the Conference Board showed.
The Consumer Confidence Index fell to
136.7 in March from February’s 140.8, its second straight decline, and
its lowest reading since October. The future expectations component of the
index, also fell to its lowest reading since October, dipping 8.4 points
to 106.2.
While the dip in confidence is a step in
the right direction, the mixed picture painted by this month’s data is
unlikely to sway Fed policy. Despite this month’s drop, consumer
confidence remains at historically high levels despite nine months of Fed
gyrations.
Although consumers’ expectations for
the future fell, the present situation component of the survey rose to its
second highest level ever, indicating that consumers are continuing to
spend like there is no tomorrow despite surging prices at the gas pump,
higher mortgage rates, wild swings in equity prices, and a hawkish central
bank. If present economic conditions hold, there is little to indicate
that the average consumer’s spending patterns six months down the road
will be significantly different from their spending patterns today.
In short, unless the economy slows and
current labor market tightness eases over the next few months, this month’s
dip in the future expectations component of the survey is unlikely to be
indicative of a coming slowdown in consumer demand. Unless this month’s
dip in confidence carries over to upcoming economic data, the end of the
rate hike tunnel is still far off.
Confidence suffered a one-two punch
today but the patient, buoyed by a sea of liquidity and a deeply ingrained
layer of complacency, is likely to make a full recovery in short order—an
event which at some point in the not too distant future will force the
Pre-Emptive Crusader and his merry band of rate pranksters to increase the
pressure, raising the decibel level from 25 to 50.
