Finally…and yet it feels like everyone had been waiting for it to happen. A 1% drop in the S&P breaking the 110 day streak! Still a surprise despite most investors believing that equities are overvalued? (Record number of investors believe so – CNBC) What about the animal spirits? What about the passive flows? Has the market topped? Dow’s black candle today has caught attention for sure! (The Black Candle: The Reformed Broker)
All we needed for the rally to falter was “reasonable doubt” and that is exactly what the investors got. The Trump stuff isn’t as easy to be cast in stone as was believed, only the market has just begun to realize that. For the S&P to move higher into 2017, hard data needs to support the animal spirits (See America’s Confidence Economy: Project Syndicate). There are no signs of that yet…and with the Fed hell bent on tightening rates, it seems to be only a matter of time.
So, where does one hide if one’s worst fears come true? It is better to advise caution given the sharp run-up in the markets of late (see James Investment Research). But then, what could one buy today if holding cash is not an option? What about the long standing safe havens? Should one buy Gold…or bonds? (Price Action Lab has an interesting take on this). Interestingly, it might be worth looking at the US Energy Sector – it does look oversold (see Knowledge Leaders Capital).
But what if one doesn’t believe there is going to be a crash but stagnation here on? Should one look overseas for excess returns in that case? One can’t blame an American investor continuing to stick to her home turf though. S&P’s stellar returns over the last century have continued to justify a domestic bias. But is America really an exception when it comes to returns? Will the past returns be a true indicator of future performance or has the US just been lucky and is peaking out today? (see Warning: The US market is an anomaly – Project Syndicate). Maybe, just maybe, it will be the shrinking number of US companies that will make investors look abroad (see Bloomberg‘s view on this).
For the permabulls, it is a time for reckoning. For the rest of us, these are interesting times for sure…after the dearth of volatility for far too long!