In short, things look clear to continue another year or two, and possibly longer but it’s just too tough to see out beyond that right now. I am becoming increasingly concerned about stocks in the short-term though. The Volatility Index (VIX), which measures expected volatility of the S&P 500 over the next 30 days, is now showing the lowest reading since this bull market began in 2009. Historically a low VIX has been indicative of short-term tops. The stock market is also pretty stretched at this point so we’ll likely see a few weeks of consolidation in the form of either a sideways pause or even a mild pullback.
S&P 500 ETF (black) vs. VIX (blue) – 15 years
All of the underlying drivers that have been pushing stocks higher in the long-term are still in play, and possibly picking up speed with the European Central Bank’s (ECB) announcement last week. It was a historic move by making the interest rate on excess reserves held by banks at the ECB negative. They also announced some additional lending programs in an attempt to boost bank lending to consumers and businesses. These actions are fairly dramatic and point to the severity of the situation Europe (and most of the developed world) still faces with the risk of deflation, little to no growth, stubbornly high unemployment and suffocating amounts of debt. Governments continue to kill any chance of a growing economy with their worldwide hunt for taxes and inherent transfer of wealth through low interest rates from consumers to themselves and banks in an attempt to keep the game going. Central banks have been forced to make these dramatic moves simply to counterbalance the deflationary effects of government action.
This has been a very confusing bull market in stocks. Most people are still focusing solely on valuations (I was making the same mistake early last year) and missing the key driver. The Sovereign Debt Crisis is the key. We’re still in the early stages and the actions that governments continue to take to keep the game going should keep a constant flow of investment dollars moving into the stock market and high-end real estate.
Thanks for following!
-Nick
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