Part 3
Despite all of the negatives covered in Part 2, asset prices remain aloft, and most of the financial sectors most prominent and brightest stars (for example see here and here) don’t predict any major moves lower. Why?
STIMULUS: LOW INTEREST RATES, HIGHER DEFICITS
Of course, there’s plenty of debate over how well it has worked, whether it was worth it, and if it can continue to work.
What it clearly has done is:
- Prop up risk asset prices
- Defer sovereign defaults in the EU and avoid a banking crash in the US and EU
Indeed, as long as the private sector continues to cut debt and spending, there’s a good case that governments need to pick up the slack via stimulus and more debt for the coming year.
The only question is whether it can continue to work. Given the consensus that risk asset prices don’t make any major moves lower (cited above), most analysts clearly believe it will, despite the above bearish headwinds.
Certainly there are compelling reasons for policy makers to keep the stimulus cash flowing unabated:
- It’s buying them time and deferring economic pain that would get them voted out of office.
- As long as fundamentals remain weak, and consumer spending is suppressed by stagnant and falling real incomes, then:
a) There is little inflationary pressure likely barring sudden fears of supply shortages in energy [i.e. ME tension] or food [global crop failure]. Barring such events, there is still plenty of excess capacity that makes disinflation at least as much of a threat as inflation globally, and in some places, like Japan, the bigger threat.
b) Overhanging fear keeps up liquidity demand, and thus demand for some of the most heavily printed currencies like the USD, and at times even for the EUR and JPY. In the long run however, all three (and others subject to similar policies) should depreciate versus both better managed currencies and hard assets.
- Ultra low rates are indeed forcing yield hungry investors, including the huge cohort of aging baby boomers who are desperate to build savings, forcing them into risk assets. Indeed investor driven demand may be the primary fuel for the nascent housing recovery in the US and elsewhere.
Of course this unprecedented money printing party has dire long term consequences. For example, the US’s sovereign debt level is already so high that every 1% increase in interest costs it about $500 bln, the same cost as the entire fiscal cliff. In other words, to get rates back to anything close to historical norms, the US will need to absorb 2-4 fiscal cliffs. Good luck with that, no matter how gradually you do it. Anyway, that’s a separate topic. Let’s get back to 2013.
OTHER BULLISH FUNDAMENTALS: THEY’RE RAMIFICATIONS OF SUCCESSFUL STIMULUS
There are other bullish factors but these mostly depend on stimulus continuing to work. For example:
- Slow but steady recovery in US housing and jobs markets, assuming a fiscal cliff deal that avoids most of the deficit cutting measures that comprise it.
- China, EU stabilizing or growing, also assuming that the steps implied by promises to do whatever is necessary actually work
Yes, I’m going light on details here, such is the nature of an already long summary of the entire crop of 2013 forecasts
ABOUT THOSE BULLISH VALUATIONS
I’m not touching that debate about whether stocks are at attractive valuations.
Valuation is in the eye of the beholder and essentially depends on individual assumptions about the future. It’s too detailed a discussion for this kind of summary and conclusions vary radically with method. See here for just one example
Again, much depends on a belief that there is no significant contagion risk from an EU, US, Japan, etc debt and banking crisis.
2013 TECHNICAL BIG PICTURE MIXED: MOMENTUM VS. RESISTANCE
Fundamentals drive long term trends, and charts express them. The S&P 500 Monthly chart is as good a long term risk barometer as any. Here’s what we see from the monthly S&P 500 chart below, covering mid-200 to the present.
The Bullish: Three Year Old Momentum
There’s no better evidence for not fighting the Fed, never mind virtually every leading central bank, when they’re all teamed up in easing mode, than the entrenched upward momentum shown in the chart above.
An over 3 year old uptrend. Sure, it’s mostly a due to government intervention, which can’t last forever. So what? If you don’t believe stimulus will continue to work through 2013 then there’s no reason not to be bearish and ignore this chart.
The 10 (blue) 20 (yellow) 50(red) and 200 (violet) EMAs are all trending higher. Also, the faster ones have the steepest slope, suggesting increasing upward momentum with no sign of these getting ready to cross below the older EMAs (which would indicate weakening momentum).
Bearish 12 Year Old Resistance
From the 1426 close to the 12 year old resistance formed by the bearish double top around 1550 there isn’t much upside left.
Conclusion: Long Term Chart Neutral
The technical picture suggests at least a modest move higher to test that resistance at some point in the coming year. Whether the index, and by extension risk assets in general, can sustain a move past it depends on whether you believe the upward momentum can overcome this resistance.
Again, because the rally of the past 3 years was mostly due to stimulus, your belief in this momentum is based on whether you believe this policy will continue to work.
Even if you believe resistance will hold, that doesn’t mean there would be any pullback beyond what we’ve mentioned.
