The new normal: a heightened level of stock and investment interest, decreasing profit margins and earnings for corporations. The divergence caters to stock pickers as the macroeconomic forces at play will govern the largest portion of companies as they have for the past four years. Factors that have largely propped up the market since the generational low in 2008 such as Federal stimulus, corporate earnings, and fiscal policy are waning in their support for the U.S. recovery. While QE3 began last fall, Operation Twist concluded December 2012, and while stimulus continues, many hawks are already calling for its end, which investors should see as a threat to the market.
Corporate earnings have created the growth in the market, fueled by a stimulated economy, the Dow (NYSEARCA:DIA) has broken record after record in the past week, yet many expect corporate earnings not only to slow down, but retract. I am mindful of the bear case, however, until stimulus comes to an end, corporate earnings slow-downs will not faze the market drastically. Fiscal policy is the primary concern of so many investors and companies. As the United States reaches a conclusion to the fiscal drama since the country has had a budget, there is a great deal of upside as that risk fades. The massive correction that so many are calling for may be coming, but don't hold your breath. It may be until 2015 when the government attempts to figure out how to exit its stimulus programs. Until then, expect new highs and a shallower price channel for the S&P (NYSEARCA:SPY) that ends 2013 in black again.
The money inflows are exploding and there is no reason to sell momentum from inflows unless they are thought to be temporary. As the economy improves and jobs are gained, new 401(k) polices are initiated, people have more discretionary income, and spending increases. If the expectation from the Fed is that by 2015, the economy is to have 6.5% unemployment, inflows will continue to rise. Expect P/E values to increase in U.S. equities broadly through the first and second quarters as earnings fail to support the price increases from new investor demand but there is plenty of cushion for most multiples to expand in 2013 and 2014. When there is uncertainty, there is a lull in the Volatility or VIX ETF (VXX), which typically precedes a bigger move in the S&P. VXX closed at a very low $20.92 Wednesday, just 29 cents from a 52-week low. The potential market move does not have to be negative, as the market confirms record highs through the SPY, there is little reason why investors would not see this as support, albeit sluggish, the new normal is still a growth story.
Nonetheless, the play is the VIX. Whether corporate earnings are actually unsustainable in the near term or they surprise, price changes are likely to be more dramatic which benefits the VIX. There are plenty of volatility on deck other than the upcoming record high for the S&P as countries around the world take action to stimulate growth and European recession is back in the forefront of many investors' minds as is next U.S. equities bubble. With a 52-week high in the 90's, VXX could be a very profitable position if volatility picks up as expected.
Disclosure: I am long VXX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I am not a professional advisor; my interpretations of the market are independent and should not be construed as advice