No fear or loathing in the markets

Do you recall the days when markets would pull back when there was a terrorist event in the world?

When investors would at least pause when the fired FBI Director was speaking on Capitol Hill about events and conversations with the White House?

Some of these market participants would even sell when the Federal Reserve raised rates. Speaking of the Fed — the ultimate backstop on falling security prices — it said last week it would begin pulling some $2 trillion out of the markets over the next 2 years or so.

What did we get from the markets?  Crickets

These investors used to be called skittish. But they seem to be gone. They have been muscled out by money that seems to know something. There are so many signs that the market is ready for a pull back.

What that something is that the markets know could certainly be helpful to small investors.

However, this is the time market pros say when the “dumb money” comes into the market. Small investors seeing new record highs most days and who have been on the sidelines fearing a repeat of 1987, 2001 and 2008.

I’m of the opinion that you don’t need to catch the last 5% move upwards, when the risk is you could get caught in a 50% downside collapse. It’s not a zero-sum game, you can take some profits and leave some positions for the possibility markets will go higher.

 

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Too bad the "dumb money" isn't in the know

As equity markets in the US soar to all-time highs on the Dow Jones industrial average and the S&P 500 indices who is profiting from the run up?

Certainly those companies that have been buying back stock for the last seven years, with the probable exception of Apple.

But not so much the small investor. After 20 straight weeks of equity outflows from funds, the Main Street investor probably missed the latest moves and will be kicking themselves.

That’s why it’s called “dumb money.”  to head for the hills after the horrible start stocks took to begin 2016. The Dec. rate hike was taking its toll on their portfolio. So sell they did and parked the money in money market funds or other vehicles in their 401(k) plan.

Now to re-enforce the term “dumb” these investors will read the headlines today and say, “I got to get back in, before I miss more profit.”

Unfortunately, this may not be the time to jump in, but then again we will probably have plenty more upside as the Fed will be pushing stocks higher so voters feel good about the Democratic economic plan. We know that the market and the economy are two very different measures of the economy, but Main Street doesn’t.

However let’s look at who was buying when all that “dumb” money was looking for the exit. Central banks around the globe led by the EU and Japan were huge equity buyers over the first half of the year.

These central banks added almost $750B to their balance sheets in equities to offset the selling by emerging markets, which were decimated by the stronger dollar and weak crude prices.

So again, we have central banks propping up the one percenters with an equity price bubble as the rest of the investors moved to the sideline being gun-shy after 2008-2009 almost wiped them out.

There is a very good reason why the fastest growing age cohort in the Bureau of Labor Statistics is 55+. There’s not much left to retire on, despite the stock price bubble.

The “dumb money” is only dumb, because it’s not in on the game. It’s the smart money that knows the fix is in.

And that’s why it’s ingenuous for the Fed to say it has no fingerprints on the soaring income inequality that has hit the US and the globe over the last eight years.