After dropping for the first four days of the week, the S&P jumped on the last day and erased the earlier losses. While the S&P ended the week up only 0.36%, volume fell off and near-term volatility fell only slightly. But since volatility was already near multi-year lows to begin the week, another small dip simply means that the US stock markets are even more complacent than they were the week before.
What led to the huge spike on Friday?
A better than expected jobs report. Investors were perfectly willing to overlook the fact that the magical add-backs of seasonal adjustments and birth/death adjustments took a NEGATIVE 200 thousand jobs figure and spun it into a “better than expected” positive 163 thousand figure.
What’s even more startling is the mood that’s settling in on Wall Street. If news is better than expected, then markets should rally, because a better employment picture leads to a better economy and better corporate earnings. And if news is worse than expected, then markets should also rally, because the Fed will certainly step in with massive monetary stimulus which leads to a better economy and better corporate earnings.
Although it’s hard to believe, a “can’t lose” mentality is starting to pervade the risk markets. And with yields on government and corporate bonds driven into the ground, the other pro-equities argument is naturally—buy stocks because bonds yield too little income.
If only this were really possible. And HOW do we know for sure that it’s NOT really possible? Because, if it were, then no equity market crashes would have ever occurred in the 99 years since the Fed was created, and certainly not over the most recent decade when the Fed has benefited from the wisdom accumulated over the prior 89 years.
And yet, stocks crashed in 2002-2003 and again in 2008-2009.
And they will most certainly crash again.
Will the next crash look just like the last crash in 2008-2009? Probably not. They always seem to differ in their degrees and their duration. But crash they will.
This time is not different, no matter how many times you hear that from pundits on CNBC and Bloomberg, and lately even from people affiliated with the Treasury and even the Fed itself.
Remember, the four most dangerous words in investing are “this time is different”. And when you begin to hear this sermon, and observe that it’s becoming commonly accepted, then you know that the end of good times, or high prices, is closer than most people think.
Today, prices are generally high. Corporate profits are at record highs. Bond yields are near record lows. Complacency is very high, and most asset owners are happy to own; they’re certainly not happy to sell.
This means that prospective returns, today, are unusually low. And market risk is unusually high.
And while it’s impossible to predict exactly WHEN this unfavorable set of market circumstances will express itself, it’s very possible to predict with a high degree of certainty that they WILL express themselves, in the not too distant future.