Deflation is in the air. It’s gutting the prices of raw materials, emerging markets, junk bonds and starting to catch up to equities.
It’s going to get ugly
The journey up was fast and fortuitous, without the structural economic improvements that should accompany such a prolific bull market. And more importantly, with enormous leverage and speculation driving prices.
The mini-panic on August 24, 2015 showed us that the market is capable of wild swings, and likely enormous drops. In 2008 we saw the stock market lose more than a quarter of its value in days. This sort of action is not only likely, but I expect it.
This level puts the index back to major area of psychological support and also seems to complete what may be a head and shoulders pattern forming on the S&P 500 back to the base of the left shoulder.
1,000 is a level where the market was before the latter incarnations of QE wildly distorted prices higher. I believe that the beneficial effects of QE were overestimated and that the detrimental effects underestimated.
The gross distortion of prices has destroyed many price signal indicators.Adding to that the lack of interest bearing savings account has forced savers to speculate, hoping for a gain.
The stock market’s valuation has largely benefited from corporate buybacks. Now corporations possess an enormous amount of debt.
Additionally, corporations tend to get cold feet as the market is volatile or when prices decline quarter over quarter. That means less buybacks should occur as fear overtakes greed.
Have some cash set aside
Right now my own inclination is to make a wish list of stocks to own and an idea of what prices make sense to buy them. Then wait for prices to come to me.
Rather than chasing prices or settling for buying something that may be overvalued I think it makes sense to set cash aside and buy in at lower prices. In all likelihood they are coming soon.