welshmoneywiz

Up until the end of last week, the market had given up a little more than 8.0% since the September peak (an 8% pullback is about the average size of a normal bull market correction), and while that could imply a reversal of fortune may be due, more downside may be in store before a good technical floor is found.

This is a tricky situation. On the one hand, stocks are oversold and due for a bounce.  On the other hand, the momentum is still pessimistic, and we have to assume that trend will remain in motion until we clearly see it isn’t.

The bullish case is bolstered by this weeks positive results, which stopped the previous declines.  The market’s previous fall of 8.8% from the September high is right around the normal bull market correction.  So, the reversal clue materialized right where it theoretically should have.

The bearish case:  There’s still no assurance that the bullish days will continue. In fact, the stockmarkets could carry on gaining  and still not snap the losing streak ( as compared to September’s highs).

Any additional clues from the CBOE Volatility Index?  No, not really.

Just for some perspective, there’s still plenty of room and reason for the stockmarkets to keep tumbling.  Point being, if the bulls are serious here, there’s not much of a foundation they can use as a push-off point.  Then again, the VIX is clearly hitting a ceiling at its 52-week moving average.  Until and unless it can be hurdled, the bulls don’t have an enormous amount to worry about (they just have a little to worry about).

So could the recent corrections and this weeks swing be the formation of a swing low of an intermediate market-bottom being formed? 

Typically the stock market will rally fairly aggressively out of one of these major intermediate bottoms, often gaining 6%-8% in the initial phase. At that point the market will dip down into a half cycle low that will establish the trend line for this particular cycle.

The Dollar (USD) is now, based on its daily cycle, overdue for a move down into a short-term low . This, I would expect, should help drive the first half of that 6%-8% move, followed by a short corrective move (as the dollar bounces) and then rolls over quickly into a another phase down.

If this is the case, I believe the cycle would be due to bottom around the first of the year and should drive the stock market generally higher into early January 2013.

We could continue to see the dollar generally heading lower with intermittent bear market rallies until it puts in a final three year cycle low in mid-2014. This should keep the stockmarket generally moving higher at least until the point where commodity inflation collapses Consumer Spending. Once that occurs the stock market will stagnate. The fear is that the US Federal Reserve may continue to print money, and this may cause the environment of artificially high money supply, which could lead to creating the conditions for the next recession.

As has been the case in the 1970s and also during the last cyclical bull market in 2007, I think we will probably see the stockmarket at least test the all-time highs, if not a marginal break above them, before rolling over into what I expect will be a very complex bear market bottoming sometime in 2015.

As with all predictions. They are dependent on sentiment, market forces and behavioural economics and as such I reserve the right to change my views and expectations, based on information as and when it arises in the future. The scenarios suggested and dates predicted are based on current information. The future is unknown and will change the potential outcome as estimates become actuals.

This is why we carry out sensitivity analysis, stress-test portfolios and incorporate diversified portfolios because the one fact we can be sure of is everything will change.

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After months of waiting, investors now have one less uncertainty to deal with. The election is over, and voters decided to give President Obama another four years to lead the country.

In addition to winning, the Democratic Party retained a majority in the Senate, picking up 2 seats. However, the Republican Party also maintained its majority in the House of Representatives. This means that the political leadership will not change significantly. That doesn’t mean everything will stay the same. Voters decided to retain many of the same leaders, but recent polls suggest many people want to see different legislative results.

Looking ahead, the new Congress and President Obama must now find a way to boost economic growth and create jobs. Along the way they need to avoid the fiscal cliff, foster trade with other countries and maintain the security of the United States in an increasingly threatening world. Unfortunately, avoiding the fiscal cliff and promoting economic growth are immediate problems. If Congress fails to take action, the Bush-era tax cuts and the Obama payroll tax cuts will expire at the end of this year. At the same time, mandatory federal spending cuts are scheduled to begin (as lawmakers could not agree on a compromise to reduce the deficit during last-years’ debt-ceiling negotiations). The Congressional Budget Office estimates that the economy could go into recession and contract 0.5% next year if all the tax hikes and spending cuts take place as scheduled.

We believe there are several scenarios that could unfold around the fiscal cliff. The most likely outcome would be that lawmakers would find acceptable middle ground including some tax increases and spending cuts but not the full measure scheduled to occur at the end of the year. Modest tax hikes and federal spending cuts would not severely hurt the economy but would be a drag on economic activity next year.

Recent economic news shows that the U.S. economy is slowly recovering from the 2008-2009 recession. Fortunately, the housing market has finally turned up after six years of subtracting from economic growth. The country will face some fiscal drag if Congress allows some tax increases and spending cuts to reduce the deficit next year. This fiscal drag will most likely be offset by the recovery in housing and continued increases in consumer and business spending. As a result, we believe that the economy is likely to grow in 2013.

Many investors may be concerned that the election outcome will lead to continued political gridlock that has existed during the past two years. However, both parties recognize the risk to the economy if lawmakers do not address the fiscal cliff. Therefore, during the next few weeks we are likely to see both parties talk about a willingness to work together, but start the process by stating the pre-conditions for cooperation. We believe this would just be the first step toward addressing policy differences. Obviously, the process will not be quick and easy.

Some strategists are suggesting that Congressional Leaders could allow the country to go over the fiscal cliff as a way to force a compromise. If this happened we would expect any compromise after the first of the year would be retroactive to the start of the year and the economic impact would not necessarily be that severe. The outcome would be volatile financial markets.

So what do the elections mean for investors? We believe that the underlying U.S. economic fundamentals remain favorable. The economy is growing, and the uncertainty of the election is behind us. If Congress and the President can find some middle ground and compromise over tax hikes and spending cuts, the outlook for the economy would be better than the worst-case scenario of allowing all the tax hikes and spending cuts to be implemented as scheduled.

The economy is expected to start the year on a weak note until the fiscal cliff issue is addressed, but we expect economic momentum to build as the year progresses. In this environment, the stock market would be volatile during the next few months. The positive seasonality during November and December could support stocks if investors see Congressional Leaders trying to work together. Longer-term, we look for the stock market to have modest gains next year.

Fortunately, the Federal Reserve’s easy money policies will partially offset the fiscal drag of reducing the deficit. The government may borrow and spend a little less next year if a compromise is reached but net lending in other sectors of the economy has increased, and this increase in credit in the private sector is likely to support economic growth. In addition, the credit markets are likely to benefit if the Fed continues to provide liquidity to the economy by buying bonds until the unemployment rate declines.

My clients have been positioned with asset preservation and potential of positive returns in mind during the past year. This was in order to deal with the uncertainty of the global environment, the Eurozone debt Crisis, slowdown in China’s GDP, the US election outcome and the pending fiscal cliff (to name just a few). Finally, businesses appear to have delayed capital spending and hiring until the direction of governments policies becomes clearer. After waiting much of this year, next year could potentially be a year of action and less worsening situations (possibly even improving situations). Investors may take a less defensive position, assuming investor sentiment improves (on a relative basis, this is anticipated) and this could lead to stocks outperforming bonds in 2013. If this scenario ends out being true then cyclical sectors of the stock market are likely to perform better than defensive sectors. Although this is only an “if”.

Tags: Collectives, Financial Planning, Investment Bonds, Investment Planning, Investment Trusts, ISAs, Mutual Funds, Pensions, portfolio investors, Retirement Planning, Wealth Management and Tax Planning