The Sound of Silence

It’s quiet, real quiet, too quiet.  The stock market is quiet, the economy quiet. It’s so quiet, it’s downright eerie.  And just like an Indiana Jones movie, you know when it gets this quiet that something very terrible or very good is just about to happen.  And while this makes for a great movie, it makes things very nervous for investors right now.

Investor “Wall Street” Jones is searching for high returns with low risk, which is now as difficult to find as the lost ark.  Jones survived being crushed by the giant rolling debt crisis in 2008, but now is trying to navigate a financial jungle filled with junk bonds, commodities and Chinese, Greek and Spanish obstacles. He must walk across a very unstable bridge that is built with Euros.  A few years ago the bridge was rock solid, but now the bridge is so rickety that it could suddenly collapse and send Jones plummeting to financial ruin.  He is trying to avoid building the “Portfolio of Doom”.

Jones is very concerning about the lack of activity as he navigates through this jungle.  He then reaches a clearing and realizes why things are so quiet.  All the creatures in the jungle are assembled watching two knights engaged in a brutal jousting match.  The winner will be deemed worthy to fight the nasty, fire-breathing, dragon that goes by the name of “Bad Economy”.

"Bad Economy"

One knight, Sir Barack, has been fighting the dragon for over three years.  The dragon has been winning this battle and in fact Sir Barack’s pants are currently on fire.  But Sir Barack believes he can slay the dragon if he is just given more time.  The other knight, Sir Mitt, believes the dragon should have been slain by now and thinks Sir Barack’s lance is flaccid and incapable of defeating the dragon.  Sir Mitt believes he is rather good with a lance since he has experience slaying smaller monsters.  The jungle is expected to be rather still until one knight is victorious and the battle with “Bad Economy” resumes. 

Quiet Until November?

This election is so pivotal and the difference in choices (and economic direction) is so great, that it seems like the stock market and maybe even the economy (lack of activity due to uncertainty) have ground to a halt.

In a normal presidential reelection year, the incumbent takes significant actions to stimulate the economy and thus improve his election chances.  Congress usually supports these actions because most of them are up for reelection also.  These actions usually work but can be harmful for the economy in the long-term.  However, an incumbent president doesn’t really care.  If he wins, he just thinks “Hey I’m in for four more years, suckers!”  If he loses, he just says to the winner “Good luck dealing with that mess sucker!”

But this year has been very different.  There have been no big economic stimulants and economic growth has been anemic.  Possible reasons for this are:

A.   The economic is so weak that it can’t be stimulated much

B.   The administration has already fired all the stimulus bullets in its economic pistol and so it has nothing left to try 

C.   The administration is so inept that it has no idea what to do (the Republican favorite) 

D.   The administration has all these great ideas (that for some reason were not tried before) but the stupid Republicans in the House of Representative are obstructionists and won’t agree to anything (the Democratic favorite) 

I’m hoping the answer is B, but I fear it could be A or C. (you can vote by commenting after this post)

 

Do Not Believe the Election Year Models

You may read articles about what the stock market does in certain months of an election year and for that matter what will happen after the election.  As I have said several times this year: the traditional economic models and indicators are broken.  This is a strange and unique situation so do not invest based on these historic-based models. 

Something Big is Going to Happen Soon

But things are too quiet.  Something big has to happen before the end of the year, unfortunately in this crazy situation it could be a spike up or a crash down.  If I had to bet, I would bet for a drop.  In May, I forecasted an S&P 500 Index low of 1245 this year before a recovery.  I expected the drop to have started already so I am much less confident of that forecast now.  But it remains quiet, much too quiet.  So put on your Indiana Jones hat, keep your head low, and beware of the snakes that can poison your portfolio.