As has been the case for the last seven months, the market continues to be in the midst of a sustained, rising price-trend environment. This has been ideal, as it reflects the reality that the markets as a whole continue to be normal, they are experiencing more positive days and weeks than negative ones, and the risks of owning equities right now are flat-out worth it.
Obviously, this hasn’t always been the case, especially over the past decade! Inevitably, markets are driven by long-term trends more than they are driven by short-term events. But history is clear in pointing out that free market capitalism often reflects both the greatest successes of human accomplishment as well as our greatest failings. These twin facts are inescapable, and they each result in sustained advances for the markets and sustained declines – each in their own time.
The non-economic events of the past few days are good examples: September 11, 2001 was a one-day horror that rattled the global markets, but it was the ensuing recession (caused largely by 9-11) that created far more economic harm than the terror event itself. With the death of Osama bin Laden this past Sunday and all of its political and social implications, I would expect the markets to eventually factor in all economic implications of his demise as well (if any). It is important to remember that the seeds of 9-11 were rooted in economic issues as much as they were in anything else – specifically, the military presence maintained in Saudi Arabia to protect global oil interests after the first gulf war was often cited as a significant root cause of Bin Laden’s desire to attack the U.S. The tens of millions of global market participants will each “vote” as they should with their investments in response to this and and any other event, which will immediately affect the price of all investable assets they might use (with oil, gold, and the U.S. dollar/treasuries likely being the most impacted) . But because the global markets are already in the throes of a strongly supportive trend, it is highly unlikely that Bin Laden’s death will be a significant economic event one way or the other.
Of far more consequence is the fact that corporate earnings across the globe have been solid. Taken as a whole, the S&P 500 Index will book near-record profits during this quarter, which explains the U.S. rally over the past few months. This fact is already priced in, which means that next quarter’s earnings are also being considered in the price of both individual companies and the markets overall. For the current rally to continue, earnings will have to continue to improve. If they do, the market rally will likely continue. When they eventually fail to keep up with current growth rates, however, the current trend will have run its course. That could coincide with today (which is unlikely), or it could be many months or years from now. Time will tell, as it always has.
Click here to access our current view of the markets – our five-year ETF charts with both their respective short- and long-term trend-lines. Every major market segment we currently invest in are not only showing rising price trend environments, but as you can see ALL are lined up ideally (the ETF price is above the short-term trend which is above the long-term trend). This is indicative of the breadth of the current rally, and because of this we’ll continue to hold our current assertive posture until prudent action (and risk reduction) becomes necessary.