@theMarket: Good News Is Bad News

U.S. economic growth in the third quarter surged higher by 3.6 percent, while jobless claims plunged by 23,000 to 298,000 as layoffs slowed. That's great news, right, so why is the stock market falling?

If you are scratching your head about now, who can blame you? Americans have been waiting for years to see the economy finally transition from a slow, bumpy recovery with stubbornly high unemployment to something akin to more traditional economic recoveries. It appears we are finally hitting our stride but growth like this could mean the end of the Fed's open-ended quantitative easing, thus the decline.

Investors are afraid that the Fed may begin to taper as early as this month, given the good news. The implications are that interest rates would rise and the stock market would decline as the Fed withdrew support from financial markets. That's what you will hear and see in the financial press, but nothing could be further from the truth.

Let me tell you what is really going on. Don't listen to these pundits who worry about a stock market bubble, pointing to the Fed's easy money policy as the culprit. I disagree. The market rally, in my opinion, is wholly justified. It is based on expectations that the economy will pick up steam and unemployment fall. As I have said before, the markets anticipate events 6-12 months ahead of time. The market media has missed that fact. They are still harping about Fed easing/tapering when the data is telling us the gains are about the economy.

It is why I have been bullish all year and am getting increasingly bullish when looking at the future. The Fed's efforts to stimulate the economy have worked.

The private sector is now picking up the slack and the years ahead should see better and better growth not only here but worldwide. That's a long-term forecast consistent with my belief that we are in a secular bull market in stocks. However, that does not mean the markets will go straight up from here.

Two weeks ago, I warned investors that stocks needed a rest. We could easily see a pullback based on sentiment numbers, momentum and technical factors. Today, I remain cautious in the near term. I accept that there are factors that argue against a decline right now. Christmas is only three weeks away and the historical data suggest a Santa Claus rally happens more often than not. Investors have also become conditioned to buy the dip, no matter how small.

If the bulls can get the S&P 500 Index back over 1,800 then the rally continues and I'm wrong. But if the markets want to use good news as an excuse to drive the markets lower, so be it. I don’t care what triggers a decline; I only care that we need to consolidate gains before moving higher.

How low could we go? If I rely on technical data, we could easily fall to the 50-day moving average (DMA) on the S&P 500 Index. From peak to trough that would be a decline of a mere 3.5 percent. If the Fed does announce the beginning of a Taper this month then we might actually see a test of the 200 DMA. In that case, we're talking a decline of over 8 percent. I find it hard to believe that the Fed would take that action on the eve of transition with new Fed chief, Janet Yellen, taking the reins in January. In either case, a 3-8 percent decline in the markets happens several times a year. It would not be the end of the world and would simply set us up for continued gains into 2014.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: Record Highs Again

Over the last 20 years or so, the three days prior to Thanksgiving have always been positive for the markets as has the day after. This year they were accompanied by record highs.

All three averages inched up this week, with the Dow surpassing 16,000 and the technology-heavy NASDAQ breaking 4,000 for the first time since the turn of the century. The S&P 500 Index beat my year-end target of 1,800 and may actually reach 1,850 by New Year's.

It was a short week for traders, with the markets closed for Thanksgiving and only open half a day on Friday. Most of the news centered on how good or bad retail sales will be during the holiday season. This year there are six less shopping days available so big retailers are pulling out all the stops in their goal to boost sales by 4 percent over last year's results.

We enjoyed Thursday's repast with wonderful friends down the road. During dinner there was a great deal of grumbling amidst the turkey, sweet potatoes (and Hanukah latkes) over the retailers' decision to open their stores once again on Thanksgiving night. Our conclusion, that America's single-minded focus on pursuing the almighty buck has reached new and unfortunate heights, was the only negative in an otherwise wonderful holiday.

We only have three weeks of trading left before Christmas as well and just about everyone is expecting the traditional end of year "Santa Claus" rally. It usually kicks off a day or two before or after the holiday and extends through New Year's and into late January.

As usual, when everyone is expecting one thing, the markets tend to surprise you. That is why I am hoping for a short-term pullback now rather than later. That would set us up for the up move everyone is expecting. Unfortunately, the longer we go without a decline, the higher the risk investors will be getting coal in their stocking this year.

All year long the market has climbed a wall of worry. If it wasn't the deficit, it was the taper or any number of issues that kept us on our toes. Through it all, the markets forged ahead.

But suddenly, the skies have turned blue with nary a cloud to be seen. Even the nuclear stalemate in Iran appears to be unwinding. For the first time in a long time, there does not seem to be anything to fret about.

That should be a good thing, right? So why am I worried, call me a contrarian (or the Grinch) but when there is no wall of worry, I wonder how the market will maintain its upward momentum in the short-term?

If a pullback is to occur, it should happen over the next 2-3 weeks. As I said last week, if it does occur, do nothing. Over the long term, whatever decline we may get will be practically meaningless. Stay invested, turn off the television and enjoy yourself.

In the meantime, take a look at this coming week's column on secular bull and bear markets, if you have a chance. Some of the smartest people I know on Wall Street are convinced that we have entered a new secular bull market. They are definitely a minority, but I happen to be in their camp. If I am right, and we have entered a new long-term bull market, there will be many more cheerful holidays in your investment world.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: Stocks Need a Break

This week the S&P 500 Index touched 1,800 before pulling back a bit. Hitting round numbers in the averages usually creates some profit taking among investors. A number of indicators are also hinting that a minor correction could happen at any time.

A stock market decline in the magnitude of 5-6 percent is overdue. I'm not sure if it will happen this week or next, but I am pretty sure it is just around the corner. I could be wrong on my timing although the evidence is building. Some of the variables I watch are flashing red lights, others are simply amber and a few remain green.

One indicator I watch is small cap speculation. Frothy markets are wonderful for penny stocks. Speculators day trade these puppies and can make as much as 8-10 percent in a short time period if they bet on the right horse. In the last few days those stocks are not working as well as they have over the past month. They are usually a leading indicator for market turns.

Then there are the momentum stocks. In bull markets there are always stocks that seem to go up and up almost every day until they don't. Take the current mania for solar stocks and companies that produce 3D printers. In the last few weeks some 3D stocks have actually doubled. But this week, these same stocks have been down as much as 20-30 percent. When momentum stalls, the overall market is usually not far behind.

As a contrarian, I also pay attention to investor sentiment. The more bullish investors become, the more worried I get. Proprietary crowd sentiment numbers indicate we are at a level where the market has pulled back several times since 2011.

Readers may ask how this cautionary column squares with my belief that we have entered a secular bull market that could last for years. A secular bull market does not mean that the markets go up and up without experiencing declines. They do, and some of them can be severe.

It is what keeps the bull going. Periodic sell offs that allow the markets to consolidate its gains and give new buyers a chance to get in is the historical formula for a long-lasting uptrend.

What I am hoping to see is a short-term decline in which the S&P 500 Index falls to its 100-day moving average. That is around 100 points lower from here. In the grand scheme of things, it's no big deal. It would allow the markets to then stage a traditional Christmas rally sometime in late December continuing through the New Year.

I'm sure you are asking what this means for your portfolio. The short answer is a paper loss in your portfolio. Some investors may be tempted to sell now and jump back in after the correction. Good luck to you if that's your plan. There is no guarantee that the markets will cooperate. What if the decline is only 2 percent? What if I'm wrong and the markets continue to grind higher without a pullback? Are you willing to be glued to the computer screen eight hours a day watching the markets for a turn that may not come?

If you can't take a short-term loss 5-6 percent paper loss in your portfolio, you are invested far too aggressively. These kinds of minor declines are the cost of doing business in the equity markets. They happen all too frequently. Get used to it, or reduce the risk in your portfolio permanently.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: Market Gains Are Just Beginning

For those who have yet to commit to equity, it is time to reassess. We have entered a new phase in stock markets worldwide. It is called a secular bull market and could last for many years.  Don't let this opportunity slip by.

Talking to prospective clients and investors over the last few years, I have heard a litany of reasons why stocks are not a good investment. The following are just a few of the more popular excuses: a second financial meltdown is just around the corner. The Fed's quantitative easing will spark hyperinflation. U.S. debt and deficits will sink the markets. Washington's politics will drive the country into a depression.

Then there are those trapped in self-fulfilling prophecies. I call them the "I missed it" crowd. These are the investors that continuously argued that the markets are too high year after year.  Now, four years later and over 100 percent higher, they are still sticking to the same mantra.  A subgroup of those dissenters, who are still holding U.S. Treasury bonds or CDs, would like to take the plunge, but they too are afraid that the stock markets gains are over.

My position is that the above investors are looking backward. Future gains will be equal to or better than those of the last few years driven by gathering strength in world economies and low interest rates.

So let's put this "markets are too expensive" argument to bed once and for all. The stock market, as represented by the benchmark S&P 500 Index, on March 24, 2000, was trading at 1,527. Today, Nov. 15, 2013, that level is 1,792. That is a gain of only 17.3 percent over 13 years (1.3 percent gain annually). That is much less than the inflation rate during the same time period and far below the market's historical average of 7 percent per year over the last 100 or so years.

Ask yourself if those kind of gains accurately reflect the advances we have witnessed over the last 13 years in education, energy, technology, science, medicine, food production industrial manufacturing and a host of other areas.  By any stretch of the imagination, does a 1.3 percent gain in stock prices each year reflect those advances?  
Of course not; but let's look at another metric, the trailing price/earnings ratio (P/E) of the market, a tool that attempts to value stocks by dividing the price of a stock by its past earnings. Back in March of 2000, the P/E ratio stood at 28.3 times earnings. Today, that ratio is only 17.4 times earnings. So why is the market cheaper now than it was 13 years ago?

The simple answer is that the stock market had been in a secular bear market for most of that time. During secular bear markets, which can last from five to 15 years, gains are hard to come by. During secular bull markets, which I believe we have now entered, the opposite occurs. There is a catch-up period where markets begin to make up for all those years of low growth. We are in that phase right now. In the years ahead, the gains will begin to slow down but should be above the historical average. We may even have a few years where we experience losses (because of a recession, for example) before growth resumes.  

So for discussion's sake, let's guess that this particular secular bull market will last a decade. If the S&P 500 Index simply returns to its historical norm, that would mean 7 percent growth/year times 10 years or a total of 70 percent. Of course, if you compounded those gains the returns would be much higher.

The moral of this tale is that anyone with a long-term view could enter the market today, despite its historical highs, and expect to prosper for years to come. Sure, there would be pullbacks, as there are in every market environment, but the trend would be your friend. How simple is that?

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: Market's New Highs Are No Surprise

Here we are just days after the latest attempt by our government to scuttle the financial markets and the averages are making new historical highs. Investors should expect more of the same as long as the Federal Reserve keeps pumping money into the financial system.

While the politicians, aided by the media machine, continue to construct one wall of worry after another, you my dear reader must stay above this daily to and fro. You must keep your eye on the ball. The ball in this case is the $85 billion per month that the Fed continues to push into the financial system.

"Taper," a word that saw the stock markets swoon and interest rates soar is no longer on the front burner; at least not this year, thanks to the latest deficit/debt debacle out of Washington. Back in September, at the Fed's FOMC meeting, Chairman Ben Bernanke had said that tapering was off the table for now due to a slowing economy (thanks to the Sequester) and possible fallout from the upcoming deficit/debt talks. The latest economic data indicates that this little charade out of D.C. will cost $25 billion and shave almost 0.08 percent off fourth-quarter GDP growth. Once again the Fed got it right.

Many on Wall Street tend to want to outguess the Fed. That is a mistake. They are the most wired-in group of financiers in the world. When they talk, it is better to just listen because they are right more often than not. Therefore, when Ben tells me no taper, I have to stay bullish on the markets. This is not rocket science, folks.

You see, the Fed controls the stock and bond markets. It has been so ever since the financial crisis. Many investors continue to make the mistake of thinking the stock market and the economy are one and the same. In times past (pre-financial crisis) that may have been so. Since then however, the Fed has followed an unrelenting monetary policy of stimulus. Although it has been only marginally effective in growing the economy and employment, it has done wonders for the stock market.

It wasn't supposed to work that way. It was supposed to be a team effort. The Fed has been hoping against hope that the U.S. government would follow their lead and use all the fiscal stimulus at their disposal to get the economy growing again. Instead, our politicians have done just the opposite. Since 2010, the government has done everything in their power to sabotage the economy. Today, with our political system in complete disarray, the Fed is the only game in town.

We now have over five years of historical experience of what happens to the stock markets when the Fed stimulates. Ask yourself, has anything changed? There is no need for second guessing here. When I told you that we would not get into a shooting war with Syria, did you listen? Over the past few weeks, when I advised you to ignore the Washington circus because it would end in an 11th hour deal, did you take heart?

Oh ye of little faith, stop focusing on these mundane issues that have little or nothing to do with the performance of your portfolio. We are going to new highs in the markets; enough said.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.