As mentioned last week, we at Alpha Capital Management receive conflicting market predictions all the time. We've rounded up some of the more compelling arguments for why the markets are sure to go up. Check out our previous blog post here for arguments to the contrary.
The Demand Effect
Supply and demand. Pensions are mostly gone these days, replaced with 401ks and other individual retirement accounts where participants invest directly in the market. Hopefully, these investors will take a long-term view and stay invested through inevitable downturns, using time to their advantage to meet their goals. Meanwhile, PWC did a 2017 “Employee Financial Wellness Survey” which showed that nearly fifty percent of baby boomers have $100,000 or less saved for retirement. Given low available interest rates, these retirees are incentivized to try to “make it up” by investing in the bull market – thus driving prices higher. This supports a demand-based view of the bull market.
Of course, while doing research for this post, I found the demand argument used to support higher tech stock prices during the dot-com boom. Take that with a grain of salt.
The Interest Rate Effect
Bond prices go down as interest rates go up. With interest rates just about as low as they can go, and the Fed slowly and cautiously raising rates, fixed income looks like a bad investment choice because rates are sure to go up (eventually). Widely accessible alternatives (such as long-short equity, merger arbitrage, or managed futures) have performed poorly over the past several years. That leaves equity as the best house on a bad block. Even though equity looks expensive, investors are likely to keep buying stocks given a lack of viable liquid investment alternatives.
The Economy Effect
Yes, this bull market is long by historical measures – but we are also in one of the most muted economic recoveries of all time. As long as the US economy and companies still have positive growth prospects, this bull market has fundamental support.
The Quant Effect
As soon as the market starts to slide, hundreds of computer trading programs’ algorithms light up and start “buying the dip.” Positive pressure from these strategies outweighs the negative pressure from the small downturn, and the market moves higher. Because of the speed at which these algorithms digest information and place trades, the tipping point from “small dip” to “rush to the exits” is much different than it used to be.
The Greed Effect
As referenced last week, a popular behavioral theory for market movements is that participants cycle between fear and greed. This is a well recognized phenomenon, and one that is exploited by sophisticated investors. As the saying goes, if your taxi driver starts giving you stock tips, it’s time to sell. As a matter of fact, this expression is older than I thought – Fortune Magazine did a great article back in 1996 on Joe Kennedy, who avoided the crash of 1929 by selling his investments after a shoeshine boy gave him stock tips. Many investors are cautious right now, not irrationally exuberant. That suggests that, on the fear vs. greed scale, we’re closer to fear than greed. (At least, until the next headline on Tesla comes out.)