Now that the stock market has recovered from the evil December sales and climbed within 2% of record highs, it's easy to see what some investors feel optimistic about.
But Doug Ramsey, chief investor at Leuthold Group, says that this adultery exceeds a troublesome dynamic lurking below the market surface – one that threatens to erase 10 years of prosperity and prosperity.
The "critical variable" he refers to is consumer confidence, which he says has shown signs of serious weakness in late. And what makes the falling confidence situation even more startling – and potentially harmful – is that it happens when market conditions seem to be just as good.
If you don't want to take Ramsey's word for it, consider the following:
- A measurement of how consumers see their "current situation" fell in March most since 2008.
- Leutholds Quantitative analysts find that today's situation reading is the indicator closely related to future stock market performance.
- When the current situation index is in a decline, as it is now, the Federal Reserve's monetary relief basically has no impact on stock performance. It contrasts with the idea that a more accommodating Fed is bullish for stocks.
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The table below shows this dynamics in action. This shows that annual S & P 500 returns have been strongly negative during periods where the president's situation confidence index has been below the moving average. As you can see, the last straw gets stuck in dicey territory.
While Ramsey does not see this vulnerability in consumer confidence, discovering his angry head right now, he warns that further weaknesses can be disastrous, especially if it is fast and sharp.
So what's the end of the game? An entire 10-year beef market with winnings, according to Ramsey.
"After several years of overdoing it, politicians should now be careful not to overdo it," he said in a recent client note. "Trust is fragile enough that excessive dovishness can actually be harmful."
He continued, "If confidentiality erodes for even a few months, we believe that the entire US recovery from mid-2009 will come to an end."
Regarding what might cause such a sudden decline in confidence, Ramsey says there may be moderate stock market failures. This may seem counterintuitive, as he also expects the flag to trust to pull shares lower. But in the end, there is a circular situation, with the two forces working together to create a vicious downward cycle.
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"It is not denied that the stock market trend has itself, become one critical "basics" now that trust has suffered a first shot, "Ramsey said. "Even a mild S & P 500 setback to perhaps the 2.750 threshold may conceivably drive consumer and investor confidence under the item without a return."
For context, 2,750 is only 5% below today's level. It's dangerously close.
With all that has been established, it must be pointed out that Ramsey and his Leuthold colleagues do not expect a full reversal of the decadelong beef market in the short term. They acknowledge that the market rally of the December countdown is still a force to be reckoned with, and they will not continue to pay for downside hedges.
Therefore, Leuthold has actually reduced hedging in recent weeks and has increased its allotment to equities by 6% in recent months.
But don't let that fool you into thinking that Ramsey & Co. calls it perfectly clear. They are still strongly focused on worsening confidence.
"Historical retracements that are larger than last month's 12-point movement have been shown to be irreversible, with US setbacks and imminent emerging markets (if not already underway)," said Ramsey.