I occasionally like to make predictions about the stock market. I’m hoping that if I’m ever right, I can parlay the retroactive correctness into fame and fortune as a stock market guru. After all, that’s how stopped clock bears like Mish Shedlock, Karl Denninger and the “evil speculator” worked it. Those that were right about the financial crisis become instantly revered because nobody seems to remember that, statistically, anything that can conceivably happen has been conceived by somebody, and they probably have a blog. It’s the anthropic principle writ small.
At any rate, here’s my advice, which I pray you don’t take, since I don’t want to be on the hook for your kids not eating: Now is a terrible time to invest in the stock market. I know I’ve been negative about the market in general for a while, as I think it has become a den of thieves, and that I think we may be in a long-term secular bear market. But what I’m saying here is different, as I’m talking now about relatively short term market timing.
If you were bold enough to get back in the stock market a year or so ago, congratulations. You’re braver than I. But I think there’s now reason to be concerned that we’re near the top of a cyclical bull market. My reason for this is that inflation is starting to become expected, and the economic recovery is actually starting to pick up steam and become real. Now that everybody knows the economy is doing well, the “wall of worry” is no longer there to climb. Once everybody knows of something, it’s hard to find a greater fool to sell to. (At least not without providing shares at a discount.)
Second, once the economy’s footing becomes secure, the Fed will turn to fighting inflation. Given that we’re starting to see the beginnings of inflation in price data, I think this will happen sooner rather than later. Thus, you’re going to have an expensive stock market, a tightening Fed, and–worst of all–an economy that really hasn’t been truly fixed. Much of our recovery has been purchased by debt, the same stuff that got us in trouble to begin with. We’re like the bankrupt family that averted financial disaster not by tightening their belts, but by finding another credit card they forgot about. So, I think it’s likely the recovery will not be particularly strong, involve atypically low job growth, and might even stall entirely once the true austerity we so sorely need is forced upon us and quantitive easing becomes too ludicrous a proposition, even for Bernanke, once the reality of inflation (which is already happening) becomes more well known.
The bottom line, is that I’m not sure I’d want to be in the stock market when the Fed starts increasing interest rates. Given how low they are, it’s quite possible that interest rates on safe investment could increase by more than a factor of two. That would significantly change the fair price of stocks, even absent a slowdown in growth.
But, seriously, don’t listen to me. I’m just writing this to say “I told you so” if it turns out I’m right.