Bear, Bear Everywhere But The Market Continues To Rally

"The art of living lies less in eliminating our troubles than in growing with them." - Bernard M Baruch

The market has been dented in April but continues its resilience on the back of some robust earnings.  The most prominent of these this week was Microsoft and General Electric both of whom provided the market with some cheer so why are so many people negative on the market and why do I continue to advocate that the market is not the best place to invest at present?

It is simple really - the global economic engine is weak and spluttering while stocks in America are close to (within 10% of) their all time highs.  An economic study the Proust Index revealed that five years after the economic crisis a third of the 184 countries that the IMF follows are poorer than they were in 2007.  Of the group of seven most advanced economies in the world, only one, Germany, is ahead (thanks to all its exports into Europe since the Euro was created).  The measure looked at real GDP per person which strips out the negative effect of a shrinking population.  This is increasingly worrying when you take into account the ballooning levels of sovereign debt.  A government relies on inflation and GDP growth to make its debt payments manageable but neither of these is happening while the debt levels continue to spiral upwards.

What is needed is growth to reset the economic clock and that is happening in certain industries but many industries will not and should not recover.  Innovation is key to America and as innovation accelerates more efficiency will be found causing growth in company profits even while revenues falter.  The problem is that this will not aid unemployment.  With unemployment still weak people need to be retrained to handle the more technically advanced jobs.  This training comes from schools and therefore it is highly unlikely that government funding for schooling will be removed (tweaked maybe but never removed completely).

Added to the cost of education the government is strapped with a budget deficit of more than $1.5 trillion and this deficit does not look likely to shrink any time soon particularly if you factor in slow growth for the foreseeable future.  To this you have to add the European problems as they are a major contributor to global growth.  If they had a magic wand and could repair the damage in a day I would change my view of the American outlook but they cannot and it appears likely that the next negative shock will come either from them or from the middle east and an oil shock.

Spain is rapidly turning into the next problem and behind that France is looking very vulnerable particularly when those running for office are talking of taxing the wealthy upwards of 75% of their income.  While I firmly believe that we should all pay our fair share of tax, 75% would cripple their already weak economy as there would be little incentive to work and earn a decent living.  Problems in France and Spain would cause global consequences not even imaginable at present but for now we have time and it appears that Wall Street is acting on the thin ice it was given by advancing relatively uninterrupted for close to two years.

However it appears that the tape is loosing momentum and looking at the monthly chart it looks highly likely that the market could be rolling over.  If it does and based again on the charts it certainly looks like the 667 lows of the S&P could be in jeopardy.  If I am wrong and Europe manages to stave off a crisis and global growth resumes without the hydraulic jack of government support, I would expect that there will be a long and extended secular bull market that will give us all plenty of time to make money, but the risks continue to outweigh the short term gains particularly when there are alternatives to investment that can provide you a safer option and a better long term outlook.