Investment rate signals market downturn

This looks like the bubbles we've seen before -- and it could be ready to burst.

By Stock Traders Daily Jan 30, 2013 3:48PM

 Arrow Down copyright Kyu Oh, Photodisc, Getty ImagesThis is the third time the market has been at these highs since 2000. We saw these levels in 2000, 2007, and now in 2013 the same highs are being tested.  


The S&P 500 peaked near 1,520 in 2000, it peaked at about 1,560 in 2007, and here it is again at those same levels in 2013. 


After each of the last two peaks, the market has turned down aggressively too, so the logical question is: Will that process repeat itself?


After each of the prior two spikes, the S&P fell to about 800, wiping out significant wealth for not only the wealthiest 1%, but also for investors of all types, retirement plans, and college savings accounts that were heavily invested in the markets. 

 

Market returns since 2000:

·         DJIA:  about +20%.  SPDR Dow Jones Industrial Average ETF (DIA)

·         S&P 500:  about 0%.  SPDR S&P 500 ETF Trust (SPY)

·         NASDAQ:  about -20%.  PowerShares QQQ Trust, Series 1 ETF (QQQ)

 

Rolling back the clock and taking a closer look at the prior two peaks reveals something extremely important as well. A strong expectation of substantial market increases existed at each of the peaks, expectations were running high, and the market and the economy were in bubbles. 


Those bubbles are rarely obvious to the masses before they begin to burst, but in hindsight we know that the Internet bubble caused the market to spike to near 1,520 in 2000, the credit bubble caused the market to spike to near 1,560 in 2007, and we know that the unwinding of those bubbles is what brought the market to its knees in between. Therefore, the logical question about the future concerns the existence of a bubble at these market levels, as there were the past two times.  

 

In consideration of the macroeconomic conditions that exist, and with particular attention to the investment rate (see Stock traders Daily) -- which is the most accurate leading longer term stock market and economic indicator I have ever seen -- two material truths exist.  First, according to the investment rate, the market is in a natural state of weakness based on demographic trends that are similar to both the Great Depression and Stagflation, and there is nothing anyone can do to stop that. That is a material fact, and although we do not know if the market will fall or the economy will weaken because the government has been spending aggressively to offset it, we do know that the second of these two important material truths also holds true. With all of the spending and the entire stimulus, the economy is still weak.

 

Reasonable people will ask themselves why this is true, because the levels of these spending programs and capital infusions has been unprecedented, and actually should have had a much more material impact to the naked eye, but the investment rate explains exactly why it has not, and the answer lies in the root of all long-term economic cycles, and the foundation for economies in general, people.

 

As sure as death and taxes, we cannot stop the influence of demographic trends, but since the meltdown in 2008 the Government has done a good job offsetting it. Looking back at the prior two market peaks, we also can reasonably assume that if the government had not spent and stimulated to the extent that it did, the economy would look different today. One might also expect that if the government were to stop spending and stimulating, the trend could reverse.

 

In my opinion, this is indeed a bubble, but this bubble is much worse because the declines in the investment rate became much worse after 2012. That means the natural rate of growth is declining, but the market has been increasing, and that entices smaller investors back into the game. Nothing is the matter with investing, so long as risk control is a major priority, but problems exist for buy-and-hold investors from these levels. Over the past 13 years, anyone who bought at these levels without controlling risk found himself 50% underwater a couple years afterwards.

 

Reasonably, those declines only happened because the bubbles burst, and it would take quite a bit to have the government stop stimulating and spending, but here is a little-known fact: As of today, the net stimulus infused by the combination of fiscal and monetary policy has changed from net stimulative to a net drain on liquidity. Officially, even with the $85 billion bond purchase program announced by the FOMC, the net drain on liquidity is about $5.2 billion on a monthly basis. I believe this is a warning of a "stimulus bubble" that should be heeded.

Tags: DIAQQQSPY
1Comment
Jan 30, 2013 6:20PM
avatar
It all depends on what happens next doesn't it?
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

122
122 rated 1
288
288 rated 2
472
472 rated 3
638
638 rated 4
628
628 rated 5
704
704 rated 6
609
609 rated 7
489
489 rated 8
275
275 rated 9
129
129 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
ATVIACTIVISION BLIZZARD Inc10
CTSHCOGNIZANT TECHNOLOGY SOLUTIONS10
FOXATWENTY-FIRST CENTURY FOX Inc CLASS A10
ITUBITAU UNIBANCO BANCO MULTIPLO S.A.10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.