The most powerful stock market moving engine, whether going forward or in reverse, is momentum.
And while there are lots of drivers of momentum, sometimes momentum itself is the primary driver.
Throughout 2019 the markets had their blips, but overall you can look back and clearly see that the momentum was mostly up.
Starting 2020 off strong, we’ve already hit new all-time record high markets, but you should be asking yourself what is happening now that’s keeping last year’s trend going.
Keep It Simple Stupid
There are lots of measures of companies and their stock prices. They include earnings, margins, profits, balance sheet metrics, market share, growth prospects, industry trends, discounted cash flow models, price multiples, and on and on.
They’re all important when it comes to buying, selling, or shorting stocks.
But forecasting movement of the whole market, by that I mean a benchmark index of stocks like the Dow Jones Industrials Average, the S&P 500, or the Nasdaq Composite, is actually a lot easier than assessing the value or direction of individual stocks.
That’s because markets move like herds, there’s an animal nature to them.
If you’ve ever watched a herd moving across a savannah or a plain, in real life or on a television program, you’re rarely picking out a single animal and watching it move. We’re watching the herd.
That’s what makes understanding which direction the markets are moving and how fast or slow easy. All you have to do is watch the herd, the market, the benchmarks.
What’s important is what’s moving the herd, what’s the general psychology of investors, what are the big picture things they’re looking at, talking about, reacting to?
The Big Picture Most Investors Need to Remember
What matters to markets, which really means what matters to investors making decisions that move markets, are big picture metrics that individually and collectively move markets. Things like interest rates and central bank policies, the economy, alternative investments, risk and reward, geopolitics, and momentum.
Momentum isn’t last on that short list because it’s the least important big picture item. It’s last because everything before it determines momentum. It’s the result of the big picture drivers, and when it’s hot, it becomes its own driver.
The short, easy to understand story of the market’s momentum since the bull market began in March 2009 is that the Fed has kept interest rates low and until last year when it toyed with raising them has openly articulated its intention to keep rates low, as in historically low, for a long time.
Low interest rates have helped the economy grow and the U.S. avoid any recession in the last ten years.
Because rates have been kept so low fixed-income yields are historically low, forcing investors into stocks for their dividend yields and appreciation potential.
The risk of being in stocks, traditionally a much riskier asset class than bonds or real estate, has been demonstrably reduced by the Fed’s articulated “wealth effect” policy, which they’ve explained is their intention to help grow the economy by making consumers feel wealthier by elevating the stock market and the value of their retirement funds invested in equities.
All that’s created momentum on top of momentum for stock markets, to the point where momentum itself has been driving benchmarks higher.
There’s another piece to the momentum picture, a big picture momentum driver all its own, that’s been an engine of momentum, which I’ll get into right here next week…so stay tuned.
What Could Break the Momentum Juggernaut
So, if the bottom-line is that momentum’s been moving stock markets ever higher, what’s out there that can derail the market’s momentum is what everyone should be asking and looking out for.
Obviously, the biggest momentum killer would be a change in Fed policy.
If the Fed starts hiking rates, momentum’s going to come to a screeching halt.
But no one expects that to happen any time soon, especially after what the Fed’s last three hikes did to stocks from October 2018 to Christmas of 2018. It flat out hammered them.
The economy could turn down and could also derail the momentum train.
But that isn’t likely. A recession is two consecutive quarters of negative GDP growth. With consumers in good standing and spending, with wages rising, and unemployment at historic lows, it’s highly unlikely the economy’s going to drop dead.
And with the Fed keeping interest rates “lower for longer” alternative investments, like bonds, aren’t going to replace stocks as the preferred money-making vehicle any time soon.
The risk reward profile of the stock market remains compelling, because the risk of any of the major big-picture drivers reversing themselves is minimal, if not out of the question.
That leaves geopolitics causing a hiccup in investors’ herd mentality and momentum itself petering out.
Today, we’ll see what a geopolitical poison arrow does to the market.
Next week we’ll see if the herd panics.
And I’ll tell you what the unrecognized mad-momentum driver has been and what could kill it.
|PS: A decade ago, a $3 stake in this market could’ve landed you firmly in the 1%. And now, due to a special set of rare circumstances, this niche sector is entering its next phase of incredible growth. Wait until you see what’s in store for 2020…|