Right now, our market (in whatever terms you measure or define it) has a huge bid under it.
When traders refer to a “bid” under the market, they’re referring to buyers in the wings who are ready to buy something at the posted price or a slightly lower price.
Bidders in the wings can have orders to buy down with their brokers, poised at the ready on a trading platform, or even wait until they get a whim, watching for the right price or feeling to hit them.
What does this mean for the market as a whole? It will go a LOT higher.
It’s easy to make money if you see the big picture, if you can see which way the market is going. Let’s forget about individual stocks for now… there’s only so much success you can have in the stock market if you are unable to step back and see it for what it truly is.
In truth, the market’s been going up steadily since 2009. It will continue going up, and I can prove it by sharing what I understand of the big picture.
I’ll paint for you a stellar background, a clear middle ground, and a compelling foreground.
The Persistent Push Higher
Let’s start with the background that everything else is resting on.
There’s an extraordinary supply and demand equation driving stocks higher. The math is simple.
On the supply side, there are fewer companies and continually fewer shares of stocks to own.
The number of listed companies on U.S. exchanges peaked in 1998 at 7,562. Wilshire Associates says, as of August 2016, the number of listed companies is now only 3,659… that’s a drop of almost 52%.
The Wilshire 5000 Total Market Index, once a definitive barometer of the total market, hasn’t had 5000 companies in its index since December 29, 2005.
Meanwhile, listed companies have been buying back their outstanding shares at a furious pace.
From 2002 through 2012, U.S. companies bought back $2.4 trillion worth of their own shares, according to the Harvard Business Review. Over the next four years, companies bought back almost $5 trillion worth of their shares.
We also have more capital being created every day. Whether the capital is created from earnings, or from central banks printing trillions of dollars’ worth of the stuff, there’s more of it every day.
More and more capital chasing fewer and fewer shares is the ultimate signal for the market to go higher. That’s the backdrop that composes the rest of our big picture.
A Landscape of Interest Rates
In the middle ground, we see the interest rate come into focus.
As far as anyone can tell, interest rates are going to remain low for as long as central banks can contain them. They were driven down globally to supply liquidity for the worlds ailing banks and economies.
Now, with central banks sitting on trillions of dollars’ worth of bonds sensitive to interest rates, they’re not going to let rates rise quickly and hand themselves hundreds of billions (if not trillions) of dollars in losses on their books.
Not that central banks have any capital to start with, but the belief in their power to supply liquidity, to backstop giant banks and spur economic growth would be decimated. And they would take all faith in the world’s financial systems with them, if the public started seeing massive losses on the balance sheets of these paper tigers.
Interest rates can, and probably will, start rising in the United States. But the pace will be glacial and managed. Small increases in rates will actually be helpful if they are a sign that the economy is growing.
In the middle ground, the primary accent is all about chasing yield. Since fixed income returns are so low, investors of all stripes (and especially big institutions and giant pension plans) have been pouring more and more money into the stock market, seeking yield in the form of dividends with the potential for significant appreciation as more and more capital gets placed into equities. That’s the game these days.
If rates were to rise faster than investors could get out of bond portfolios and they start losing money as prices fall and yields rise, they’ll unload bonds and park that money in rising equities. That’s the so-called “great rotation” everyone’s been expecting when falling bond prices start showing up as losses.
But that’s still not what the true focus of our big picture is.
The Promising Focal Point
We finally come to the foreground: optimism and improving investor sentiment.
Since U.S. elections, the market has risen dramatically. The Dow’s jumped more than 2000 points.
The prospect of deregulations, tax cuts, repatriation of trillions of dollars from overseas, and stimulus spending is driving investors into the market in anticipation of better economic growth, better corporate earnings, and hundreds of billions of dollars of more buybacks to come.
With a bright background, a low interest rate middle ground, and a foreground sketched in with promise, it’s easy to see that the big picture illustrates a rising stock market.
Of course, not every painting is a masterpiece.
At any given moment, any number of sharp impediments to the rising market could dash and slash our canvas of investors’ expectations.
The big, up-front risk to the market is that the new administration’s promises may not follow through.
China is not immune to a market meltdown. They had an equity market meltdown last year, which they recovered from with the help of government manipulation and massive backstopping. But a debt meltdown would be catastrophic, not only for China, but for the world. That’s a shadow on our horizon, a possibility yet to take shape.
But, if you fret about what’s around every corner, you’d probably never be willing to be in the market.
It’s okay to worry. It’s not okay to look at the big picture and miss the beauty in it.
Buying individual stocks in a bull market is all well and good, but you have to understand the larger machinations to really make it work for you.
Stocks can get punished if they miss earnings, and they can be devastated by disruptors coming at them from all angles. You’ve got to do your homework and be smart about putting together your portfolio.
Outside of individual stocks, there are all kinds of ETFs that are excellent proxies for the market, sectors, or asset classes that you can buy and sell in a moment’s notice. (Here are some recommendations of specific ETFs for 2017.)
With a huge bid under the market that you can truly see for what it is, it makes perfect sense to buy in and enjoy the ride.