The market can’t move higher unless we get:
Continued QE (no “tapering”)
Even more QE!
Low interest rates till 2015, 2016, 2017…and beyond!
Major Chinese market reforms
The European Central Bank gets more dovish
Earnings accelerate, revenues accelerate, productivity accelerates!
CapEx doesn’t capsize
And so on. This was a great year for stocks, but what catalyst will move markets higher next year?
I’ll bet, at some point in your investing life, you’ve been guilty of asking such questions. Let’s leave the confessions to you and your maker and consider a broader point: in times of broad market skepticism and even mild optimism, investors (amateur and professionals alike, sometimes desperately) look for catalysts to drive prices higher. The mindset is: The market can’t climb unless we get some new event to propel it. Otherwise, the thing deflates like a week-old party balloon. It’s only QE that’s propping markets up to begin with!
Bull markets don’t need catalysts. Basically never have! It’s one of the great metaphorical myths of macroeconomics, and it pervades. (After all, what use is macroeconomics unless it argues for its own usefulness?) Policy makers feel they must do something to make markets go higher, to have economies turn upward, to restore prosperity. How will they get the “animal spirits” going? Investors routinely accommodate by lapping up such claptrap.
The whole point of animal spirits, ironically, is that they’re, you know, animal. Innate, insatiable over the long run. Markets and economies are self-organizing systems. And cyclical: they boom and bust. The booms are way larger than the busts on average, which is how you get long-term growth and wealth accumulation. Left relatively unfettered, markets and economies recover and even boom without a bunch of “help.” (Note: quotation marks are employed here as comedic device, as most policy “help” seems to me a form of Dadaism.) Cycles are, in general, far more potent than policy. Particularly among developed nations, regulation and policy fixes generally end up creating distortions of this basic cyclical process, lots of it unforeseen and very much unintended.
This narrative is playing itself out in Europe as we speak. The UK, and even continental Europe, are recovering. Not because of catalysts; because their economic cycle is simply turning upward again. To many, this feels like a statement of faith, but actually it’s one of the most empirically valid statements in economic history. And yet, nearly everyone’s asking the catalyst question—how can Europe recover if the ECB doesn’t do more? Have governments enacted enough competitiveness-enhancing reforms to foster growth? Have they slashed enough or (gasp!) too much?
The United Kingdom is a lynchpin example. Its current re-ignition of the boom phase of its cycle got going once QE was backed off. Ken Fisher has written about this repeatedly (his recent “I Can’t Wait For Monetary Stimulus to End” in the Financial Times is a must read).
2014 won’t be a year to look for catalysts—it will be a year to watch markets flex their muscles as bad ideas like QE and sweeping financial re-regulation wane.
Yes, investors are more optimistic today than they were in this bull markets’ earlier days. Ken Fisher taught us at MarketMinder years ago that it’s not just about whether folks are “optimistic.” It’s all about relative expectations—are investors more optimistic than reality? The continued search for catalyst myths like QE and fear of so-called “tapering” here in the US argue against too-high optimism today. When people aren’t looking for catalysts any longer, and believe the markets will continue riding high in spite of truly bad and worsening fundamentals—which don’t currently exist—then the cycle change is nigh.