Week Ahead: More Highs Seem Likely
A principle first espoused by a fourteenth century English philosopher and theologian has over the years since risen to a justified prominence. “Occam’s Razor,” as it has become known, states that if there are multiple hypotheses as to the cause of something, the simplest one, the one with the least assumptions, is the most likely to be correct.
It is, in effect, the philosophical version of the KISS (Keep It Simple, Stupid) principle, and is something that traders and investors should always keep in mind.
It is not that markets are simple. Indeed, it is the complex nature of them and the multiple various influences that determine price that make simplification so important. At any given time and for any given asset, a case can be made for the next move to be in either direction.
If that wasn’t the case, no trade would ever take place. For every buyer that thinks something is going up, there has to be a seller who thinks it is going down, and vice versa.
The eventual direction is usually decided by the relative number and conviction of those in each camp, and that in turn is usually a product of the most obvious influence or influences.
Right now, there are two things driving stocks higher. First and foremost are business-friendly governments. Here in the U.S., the Republicans control the White House, the House of Representatives, and the Senate. They espouse policies such as tax cuts and deregulation that are designed to increase profits, encourage investment and boost stock prices. Even in less obvious places such as China and India, growth oriented, business friendly policies dominate the conversation. Add that to the existing recovery, stock appreciation results.
The second is that from a global perspective monetary policy is still loose. When the Fed reversed policy and started to tighten last year, there were fears that others would follow suit. That hasn’t happened, and financial institutions around the world are still being handed cash to deploy. Some of that inevitably finds its way into U.S. stock markets.
If you are bearish, there are a number of convincing arguments you can make. You can point to the events of 2007-8 and argue that tax cuts, deregulation and free money will ultimately cause problems. You can also highlight the potential that any one of an infinite number of potential crises such as North Korea or the Middle East. If international concerns don't bother you, you can look right here in the U.S. and see the struggles with healthcare, or the Russia investigation, and conclude that real change is a long way away.
There are a million reasons why stocks could go down, but right now they are only possibilities. The reality is that corporate profits are growing and look set to get a boost from proposed policies, and as a result, the stock market continues to edge higher.
Worrying about what could happen is a natural human trait but it is one that investors must be conscious of and suppress. In an age where information is cheap and opinions cheaper still, there is always someone, somewhere, claiming that some elaborate hypothetical scenario is about to cause a collapse.
Remember, throughout the Obama administration, there were plenty of Glenn Becks who made a living by predicting disaster, and there are plenty of them now on the other side of the political divide.
Then just as now, most of those disaster scenarios involve an elaborate set of circumstances or a host of assumptions. When Occam’s Razor is applied, the sensible approach is to stay alert to the possibility of a reversal, but to tune out the noise and work on the most likely outcome, that stocks will continue to rise until something actually changes.
The price action over the last few weeks indicates that that is what is happening. When bad news comes, it causes a selloff of sorts, but buyers quickly emerge and the move is reversed. That has led to a series of new highs and there is no obvious reason for that to change.