Stock traders have been laser-focused on two goals lately: 11000 on the Dow and 1200 on the S&P 500. The march toward these goals has been relentless; the general thinking seems to be that crossing those barriers will finally force the proverbial sidelines back into the game.
To the extent, mind you, that Mr. Market has a game plan. While the media often characterize the market as a singular entity, it obviously is nothing more than a large collection of subjective players, each focused on their own goals rather than any collective goal.
Yet it certainly seems in the last month or so the market has moved in lock-step. This march higher has taken on a life of its own, in the press at least, where it’s being painted as bona fide evidence that the economic recovery is here. After all, the market is the world’s greatest predictive machine, as we’re so often told (except for, say, in 2007; but never you mind that.)
I’ve said a few times, however, that this is an insider’s market. I’m not so sure the market is telling us anything about the wider economy. Profit growth has been more a function of cost-cutting than top-line growth. Despite Friday’s jobs report, the economy is not adding jobs at any kind of rate that will drive real, lasting growth. The market reflects mainly the cheery optimism of the sell-side crowd.
Volume has been meager. The wider populace, many of whom got flat-out crushed, has not come back to the stock market, leaving it to the pros. This, of course, makes it easier to drive the market where the sell-side wants it, higher. And it’s not like they’re even really trading their own money: the Fed pumped more than $1.5 trillion into the marketplace. At least a couple of bucks worth of that “found money” found its way into the stock market.
So who’s driving the tape? Gluskin Sheff’s David Rosenberg said he suspects it’s the pig farmers. “Who are they pray tell? They are the prop desks at the five large banks. They buy and sell securities, with leverage … to each other.” But there are ramifications to this kind of thing, he pointed out:
Of course, it is always difficult to predict the future, but so many investors are caught in the moment and are being told “not to fight the tape” and simply play the momentum game. They do not see that the current rebound in the economy is a statistical mirage orchestrated by record amounts of monetary and fiscal stimulus that are simply unsustainable and actually risk precipitating a very unstable financial and economic backdrop in coming years.