Friday 1 February 2013

Dow 14000: let's be careful out there

Before you read on, please take a glance at the disclaimer-ette in the top right corner of the page.  I'm not in the business of giving investment advice.  However,  I am an investor (only with my own dough) and I'm amazed by the lack of perspective in some of the media comments I'm seeing on the current state of the equity markets.

This morning the likes of CNN et al were all in a lather about the DJIA hitting 14000 -- a historic level, they called it.  Last time the index hit these heady levels was February 2007.  Remember what happened not long after that?  That's right, the biggest financial crisis since the Great Depression.  In fact, at the very time that investors were pushing the market to previously unseen heights, the savvy money was strapping on all kinds of shorts in anticipation of a nasty correction.  Just read any of Michael Lewis's recent books for the gory details.

That very recent experience should tell you all you need to know about the predictive powers of the stock market, and it should also condition the way that you look at this current bull market.  There are plenty of pundits out there urging caution, and they're right to do so.  Sure, the US economy is in much better shape than the Republicans were alleging during the election campaign, but it's hardly robust.  Any strength it does have is largely due to the extraordinary amounts of stimulus still being supplied by the Federal government and the Federal Reserve.

Investors are awash with cash and returns on fixed income instruments are still lower than Sarah Palin's IQ.  There are tentative signs of recovery in property markets, but you wouldn't want to get too extended there just yet.  So where else can investors turn except the equity markets?  The current strength is driven by excess liquidity rather than well-founded confidence in the future of the economy.  That's not the basis for sustainable gains.  There's no irrational exuberance out there that I can see, but it's all looking a bit frothy.  Stay alert, stay solvent!

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