Is stock market going to tumble over the fiscal cliff?

I saw the following comment/question just the other day and was surprised since it was in response to a posting I initiated way back in August 2011 entitled “Is the market on thin ice?” The theme of the original commentary was that in the summer of that year market sentiment was awful despite encouraging economic news. I concluded therefore that further downside risk was minimal, so why not buy the stock market (it might have been on thin ice, but the water was so shallow the risk of drowning was nil). Here’s the very recent comment/question I’m referring to:

“Well what do you think — we’ve been pretty much straight up since march of ’09 with just one minor hiccup —– no rally has ever lasted forever.”

I would certainly disagree about the ‘straight up’ part, and no hiccup over my career has ever been minor. There have been several high risk instances – discussed on this blog over the past few years – when getting out (selling some) of the market for a little while was prudent, and other times when the consensus was so bearish that (low risk) it made sense to get back in (buy some).

Recently, extreme bearishness in July and some of August this year (2012) prompted me to recommend getting back in, and just this past September I published a piece in this blog warning that October is never pretty for stocks (sell some).

Back to the question.

What about NOW?

I like the fact that he is concerned (after-the-fact of course, but that is always the way) about the sudden downshift in market values, which gets my bullish bones tingling. However before ‘doing the opposite’ (buying into a correction while others bail) I’d prefer he were in panic mode. Frankly, there’s still far too many “we consider this a good buying opportunity” quotes by investment pros and so-called experts in the media for me to get comfortable just yet.

Translation: “A good buying opportunity” coming from portfolio managers and strategists really means: “Oops, we just began buying at the peak! This sudden downturn has caught us completely unawares.”

Will all this mumbo jumbo about the ‘fiscal cliff’ create enough of a downdraft to get us into buying territory panic? It probably will, but it is not the politics of the pending cliff that will influence market values. Rather it is concern about the inevitable end to suppressed interest rates. The cliff in my estimation is simply a beacon….a reminder that governments cannot afford to continue spending unless the economy gathers enough steam to start generating growing revenues. Government coffers are running low.

Early last month my proprietary algorithm presented the following potential market moves based on various potential expected (by market players) interest rates.

The market seems to be anticipating rates higher than 6%, which you may recall I considered to be investors’ discount rate implied by market values and earnings (actual not projected) at the time. The market has since declined by 4.5%.

Bottom line, we could see the market fall another 10% to 11% from the current level if “expected” rates (embodied in valuations) rise just 100 basis points.

So right now the market is on thin ice, and we don’t really know how deep the water is below the ice. In other words, be patient and when things look extremely bleak over the next few weeks (or months) go ahead and jump in. Enjoy the video I had included in the August 2011 commentary – found it on the Internet, added some music and figure it’s worth including again.


About Mal Spooner

Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.
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1 Response to Is stock market going to tumble over the fiscal cliff?

  1. John Green says:

    Wait a little longer to buy. I agree.

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