A Tough Month For Global Stock Markets

And It Is Not likely The End Of It

All Red (negative) for the month of February (on the right above, circled in blue). We have not seen that since the beginning of 2016.

So where do we go from here? 

More selling than buying, with some huge swings in prices in relatively short periods of time, has lifted volatility levels. Technically, the inability of the market to return to its highs will mean that traders will likely experiment with price exploration and discovery to the downside (barring any significant development to the contrary) until they find the levels that buyers are comfortable with. Last time it was at around 2530 to 2550 on the S&P 500 (200 day moving average).

Higher volatility, historically, can signal the end of one trend and the beginning of the next. Until that yellow line in the above chart is breached by more buying than selling, the short-term price trend will be to lower highs and lower lows and better value for making purchases. 

The smart money will likely be patient to see what develops.

Fundamentally, US stock prices have way outperformed the economy for the last 8 or 9 or years (as a result of easy monetary policy and excess liquidity in the financial system).

And that has made valuations (Price to Earnings Ratios) expensive.

Either stocks need to get cheaper or the economy (and earnings) needs to accelerate, alot. Even GDP growth of 3% will not push the economy up to the lofty levels where stocks have gone. 2018 earnings have already built in an 18% growth rate into 12 month forward looking P/E ratios (above) .

The latest US data suggest that tax reform has boosted US incomes and consumer confidence, but in January the consumer was not buying, especially durable goods. As I suggested in my blog on Tuesday, the specter of rising interest rates may just be beginning to take its toll on very debt burdened households. 

Higher employment costs may also come in to play in the earnings equation (revenues minus increased costs). Something that will need to be monitored.

While stocks were looking for buying support through February, bouncing all over the place with the increased volatility (and ending significantly lower on the month), High Rock Private Client portfolios were flat to slightly higher, but not experiencing anywhere close to as much volatility.

And always remember that past performance is no guarantee of future returns. However, at High Rock we work darn hard to get the best possible risk-adjusted returns over the long term for our clients (and ourselves)!