Daily Gains Letter

Why I’m Not Buying the Market’s Blind Optimism

By for Daily Gains Letter |

Buying the Market’sKey stock indices are showing robust performance—especially following the Federal Reserve’s announcement that it will not be tapering its bond buying program at this time. The S&P 500 and Dow Jones Industrial Average reached new record highs last Wednesday; that means the U.S. economy is doing great, right? I mean, just look at the chart below; everything seems to be heading smoothly upward in what is supposed to be the most volatile month of the year, according to The Stock Trader’s Almanac. It’s a fact: the key stock indices like the S&P 500 continue to make successive highs!

Sadly, this seems to be the only notion going around these days, and I completely disagree with this blind optimism and faulty logic. You can’t look at the key stock indices and conclude that there’s economic growth in the U.S. economy; you need to look at other indicators as well.

Large Cap Index Chart

Chart courtesy of www.StockCharts.com

As it stands, there seems to be a significant amount of disparity.

Looking at the unemployment rate, the situation is dismal. In the August jobs report of the U.S. economy, we found that there were jobs created and that the unemployment rate actually declined slightly. That’s great, but these jobs were created in the low-wage-paying sectors. On top of that, the jobs added in June and July were revised significantly lower; mind you, the unemployment rate remains very high in the U.S. economy compared to the pre-financial crisis period.

In the U.S. economy, the gap between the rich and the poor continues to increase in the war on the middle class. The income gap among the rich and the poor in 2012 was the most since the roaring 20s, with a small portion of the population continuing to earn a major chunk of the earnings in the U.S. economy. You should not be seeing something like this in times of economic growth. (Source: Wiseman, P., “Pay Gap Between 1 Percent And Everybody Else Reaches Widest Point Since 1920s (CHART),” Huffington Post, September 10, 2013.)

Consumer spending in the U.S. economy is dismal as well. I have harped many times in these pages about how we have well-known companies on key stock indices warning about their earnings going forward. You have to keep in mind that businesses are the first to see conditions change, so if they are issuing warnings or struggling, then a great amount of caution should be taken.

What we are seeing are the key stock indices in the U.S. economy going higher mainly due to quantitative easing—the other fundamental factors aren’t as astonishing. Going forward, this could very well continue; as a matter of fact, we could see key stock indices head even higher. We have seen this phenomenon occur over and over again in the U.S. economy; if you look back at the longer-term chart of key stock indices, you will see this trend. Unfortunately, the higher they go, the more the “I missed it” mentality occurs, which drives more investors in.

At the end of the day, I really question what will happen to key stock indices when the Federal Reserve actually decides to taper quantitative easing and makes some changes to its monetary policy. Time will certainly tell.

When it comes to investing for the long term, investors need to know the risks they face, or else they may end up risking a lot more than they intended. Trade for now looks to be higher on key stock indices, but investors must question how long this will go on. For now, investors need to be cautious and not buy into the overly optimistic views that are flooding the economic news.

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