Before you get all giddy about buying this dip answer this question first: Will the financial circumstances crucial to the stock markets’ 6 ½ year bull move repeat themselves in the future?
Let’s recap events since the market bottomed in March 2009:
- ZIRP gave corporations an unprecedented chance to borrow cheap money and buy back stock for next to nothing.
- After reducing the number of shares outstanding through buybacks, corporations then used every accounting trick in the book to boost earnings even as revenue growth stagnated.
- The Fed printed billions of dollars and before the ink had time to dry they used it to buy up every bond in sight through QE1, QE2, Operation Twist and QE4 etc…
- Margin debt exploded to record heights and fueled the final push.
- Finally market breadth has narrowed to a select list of volatile momentum plays that echo Joe Kennedy’s shoe shine indicator.
Which of these factors will accompany the next record high in the stock market? Is the Fed going to reintroduce another round of QE? Will corporations lever up their balance sheets even further to buy back more shares? Can they lay off workers and reduce their expenses to boost earnings? Do margin investors have capacity to borrow more of the house’s money and gamble on NASDAQ momentum names?
Bonus question – Where will we see an increase in consumer demand emerge from that can propel us towards a real, robust, inclusive economic expansion? The economy desperately needs to find someone, somewhere who has the ability to buy (or borrow) and the willingness to do so. Absent this, it’s all smoke and mirrors.