Financial Nirvana

Includes: DIA, QQQ, SPY
by: John Jansen

This WSJ article published Friday with a story on the rally in virtually all financial markets, with equities and fixed income and commodities all enjoying gains in the first half of June 14. One money manager who commented for the article went so far as to wheel out the Goldilocks orthodoxy of the Greenspan era.

I look at equities and note that since the vox populi chose to reelect our Supreme Leader in November 2012, the market has enjoyed- by my reckoning- a 45 percent rally. On the election day in November 2012 the S&P was trading around 1430. In the week after the election the fear of four more years of anti business policies sent the market tumbling to around 1340/1350 intra day. The market has barely hesitated since and any dip for virtually any reason has been a buying opportunity.

In my opinion, that long uptrade is showing signs of irrational exuberance. GDP in Q1 was solidly negative and Q2 forecasts are being revised to the point at which first half growth will be flat. Many dismal scientists expect something north of 3 percent in the second half of 2014, but that- to my mind- requires a large leap of faith. In contrast, advocates of the New Normal doctrine argue that growth will be slow for a long time and we are far more likely to see a 2 handle on GDP than a 3 handle. Against that background I think equities are priced for perfection and would experience a significant correction if growth in the second half does not meet expectations.

In addition, the world is still a very fragile place and turmoil in the Middle East could cause a spike in oil prices with deleterious consequences for the economy. I think that there is also a confidence factor at work here, too. If the perception develops that after years of war we have "lost" Iraq, I think that realization would sap confidence and cause a reflection on the decline of America's superpower role or status. My point is that there are lots of moving parts in the equation and if any one of them is out of kilter, it could could quickly alter the sanguine Goldilocks mentality.

So just remember that no one ever got fired for taking too many profits!