Stock markets can climb a “wall of worry” for a long time if they had reached a severe level of undervaluation. Which is what happened once the markets reached severe lows following the near total collapse of the banking industry.
Roughly speaking, the market valuations were cut in half during the decline. And now they’ve retraced about half of that decline. It is time for a correction. Possibly, even likely, to be on the order of 10%.
One thing you should never do, short of war or a huge surprise like the banking crisis, is attribute market moves (up or down) to some news of the day. Long term bull rallies do often have an identifiable “trigger,” such as innovation in a major industry, or easy money and stimulus from governments.
Moves within long term bear or bull markets, however, are better understood with an examination of where the money flows have been and if there’s a point in the near term where the flows have to reverse. Retail investors and their agents tend to be herd like. Strong moves are necessary to cause their participation, and as a result they tend to be latecomers.
Most recently a lot of nervous money entered the stock markets late in this most recent retracement. It was time to pause.
So what might be a visible trigger for the markets? Unemployment rates starting to actually drop could be one for a sustainable upside move. Interest rate increases could work either way. A rush to grab higher bond yields could drain money from equities. That would be short term negative. On the other hand, a solid upward sloped yield curve could be positive if it wasn’t going up from zero, as it is right now.
Historically, progressive tax rates have been in effect when jobs and income growth expanded. That’s not commonly understood, but it’s the truth. The wealthy have many ways to avoid taxation, or at least significantly mitigate the higher rates. But progressive rates have historically reduced deficits and often push money towards capital investment, which normally creates jobs and increases income.
But the stock market reacts, in the intermediate and longer term, to pervasive triggers. Something changes and it sucks money into the market.
In my humble opinion, the next serious bull market will come as a result of government policies and taxes that encourage innovation in the energy, transportation and health care markets. Initial reaction will probably be negative in the market because such policies normally enhance competition and dominant players are perceived to be threatened–which may turn out to be very false. But such policies do help provide a solid atmosphere for risk taking.
So ignore siren calls citing some recent political statement or other as a major market mover. It is very seldom so. And as for Obama, based on the health care reform effort, not too many major corporations are listening anyway.