If you are a regular reader of “Market Musings” you may know, or at least suspect, that although I am now pleased to call the USA my home, I’m not originally from round these parts. I am, however, married to an American and ever since we met in Tokyo, and throughout our time in London, Moscow and Warsaw, we have celebrated Thanksgiving. I like the Holiday. Taking time to contemplate that for which we are thankful is a worthwhile exercise, and anyway, any celebration that involves watching sport on TV while drinking and eating too much is just my kind of thing. If you doubt that, I refer you to my profile picture.
It would seem appropriate then, if a little cheesy, to take this opportunity to look back on the year in the markets and identify some things to be thankful for.
- The Global Recovery Continues: I don’t know about you, but to me it is finally beginning to feel like the dark days of 2008/9 are behind us. The credit crunch has been and gone and banks have recapitalized to a large degree. Economies around the World have generally reverted to growth. There has been a couple of wobbles in Europe, and I have a feeling that there is more to come there, but this is supposed to be a positive piece, so for now I will go along with conventional wisdom and just say that everything in that particular garden is rosy.
- The Price of Oil has Stayed Steady: Nothing derails a fragile recovery like a spike in oil prices, but the internal dynamics of the oil market have avoided that, and have made the prospect of such an event seem less likely in the future. Oil prices are one of those invisible checks and balances in the economy of nations that so ably demonstrate the beauty and fascination of markets. As growth continues, so demand for oil rises. This in turn pushes up the price of the commodity and that puts a natural brake on the upward momentum; things are kept in check. This is fine unless something on the supply side affects that delicate balance. In the past, disruption in the Middle East has often caused a price spike at an inopportune moment. That region remains as volatile as ever, but the extraction of oil from shale fields has pushed the Americas inexorably towards the role as the biggest supplier of oil and diminished the price effect of supply fluctuations elsewhere. Even on the demand side there is a gradual move to “alternative” energy sources around the globe. This may not be good news for Exxon Mobil (XOM), Chevron (CVX) or Conoco Phillips (COP), but it has seriously reduced the chances of a 1970s style oil price shock.
- Bonds Haven’t Collapsed: I was tempted to put “yet” in parentheses in this sub-heading, but, as I said, this is supposed to be a positive piece. Considering that we are probably seeing the end of a sustained 30 year bull market in debt, both Government and corporate, the bond market has held up pretty well this year overall, despite some summer losses. Taking the iShares 7-10 year Bond ETF (IEF) as a guide, fixed income investors have lost a not insignificant 5% YTD, but the real rush for the exit from a crowded room hasn’t happened. Of course, as I have said before, the global bond market has been so distorted by the actions of Central Banks that none of us have any idea of the true value of benchmark paper, but still…We can just paste a big cheesy grin on our faces and say that, right now, everything is fine.
- The Fed and Other Central Banks: In spite of the amount of distortion their actions have caused, most investors have a great reason to be thankful for the World’s Central Bankers this year. The continued race to the bottom in the currency wars and the continued policy of injecting liquidity (aka printing money) is something that we may look back on ruefully one day. For now, however, all of that cash looking for a home has made it a great year for anybody with an equity portfolio, which leads us to number 5…
- Stocks, Stocks, Stocks!: Wow, what a year for equities! YTD, the NASDAQ is up over 32%, the Dow has put on over 20% and the S&P 500 is showing gains of over 26%. As long as you understood that political disruptions would follow the usual path of brinkmanship followed by a short term solution, it was pretty hard to have a bad year as a US equity investor.
As you maybe can tell, all of this good news is beginning to make me a little nervous. This is the product of 20 years in trading rooms, where the first lesson learned is usually that all good things must come to an end, and the less the market is pricing in the possibility of a correction, the closer it is to occurring. This article however, is about giving thanks, so I must temper my pessimism. It has generally been a great year for markets, and I am particularly thankful for the opportunity that “Market Musings” has given me to share my thoughts on it with an intelligent, informed readership.