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The Market Suffers from a Confidence Crisis

Bob Lang
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There really is no other way to explain the twists and turns of this market other than increasing doubts that higher prices can continue. We’re not talking about outrageous valuations and lack of investing control as we saw back in the late 90’s. No, I am referring to self-doubt and the confidence crisis that was created from the global financial collapse just six short years ago.

The confidence built by the Fed through several monetary programs reached peak levels recently. While we tend to like a market with some doubt (i.e. a “wall of worry”), if there is no reason to invest or trade, then players will simply exit. Today, it seems the Fed is speaking in tongues instead of being as transparent as possible – especially at a critical time like this.

Why would they not exit? Those who have been engaged and invested are probably sporting nice gains, and while it’s not rational to leave altogether, if the reasons for investing are now in doubt, why shouldn’t they take something off the table? If you held your nose, dove in and bought Bank of America at $2-3 bucks in 2009, why not sell some (or all) now that the stock is at $15-16 – especially when the environment for bank earnings growth is not favorable?

The SPX 500 is up more than 200% since the March 2009 lows. Buy and hold worked if you were not shaken by the multiple volatility events that occurred over that time period – but we all know this won’t last for too much longer. Regardless, our job is not to guess if/when it’s over. Instead, we need to pay attention to what the market is telling us.

What if you hold Apple stock that you bought way back in the dark times? The stock is up more than 600% since the low it hit in 2008, so why not sell some now? When uncertainty about the future rises, you do not want to be the only one left standing if the rug is pulled out from underneath. I am not saying it will happen – but remember how bold and confident you might have felt in 2007-08 when the markets were also at all-time highs?

Would you have even thought about selling? Most did not, and it cost them. “Why bother trimming my portfolio? The markets are going up, I have a great job, my house value is up 200% in five years – there is just no reason to worry.” This time around, we are thinking about things differently – and more objectively.

Many have been asking for a big correction. In October, the SPX 500 dropped nearly 10% before buyers stepped in. At the time, the talk was of more downside to come, but make no mistake, a drop even of that magnitude has a negative effect on confidence and psychology. What would the Fed do to shore up our confidence again?

So today we are sitting at a pivotal moment. The good times are still here – the US economy is strong, jobs growth is solid, corporations are racking up strong earnings, interest rates are still very low,and the consumer has more buying power with the strong dollar and lower gas prices. Yet, the constant chatter is that the market is due for a big correction, only because it hasn’t had one in a while. Forgive me, but I never saw this rule written in any book on market behavior.

The consumer is certainly not lacking confidence – those figures reached new highs recently. Investors, take note! You will need to show the same mettle if the markets are to continue moving higher.

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