If I hear one more analyst describe the week’s downwardly sloped market as a “healthy pullback,” I may be having to lose respect. It’s one thing to fall prey to the syndrome in which every investor is visionary in a bull market, it’s quite another to insist on the idea. It’s one thing to have been opportunistic on the back of quantitative easing – designed as it was purposefully to create inflation in assets (including stocks) – it’s quite another to insist upon the fundamental underpinning of market performance since the implementation of QE2. A “healthy pullback” implies that stocks merely got ahead of themselves, you know, enthusiastic-like, on account of economic news that has been awesome. Cool wisdom is now taking the steering wheel away from the youngsters, parentally and all, with a condescending smile and a healthily backwards pull.
Without putting too fine a point on the situation, there is a region in the world that dominates a substantial portion of global energy supply, and this region is in the midst of economic and political upheaval. According to oil prices some analysts are mindful, even if others are distracted by the idea of some natural correction – a “healthy pullback” – taking place. It does take time for news to get delivered, and information doesn’t travel as quickly today as it hopefully will once the Internet really takes off. In the meanwhile, there is quite a backlog of news still to be processed, and by the time this “healthy pullback” has run its course maybe some other points of turbulence will finally be admitted to the canon: Chinese inflation, for example, and the likelihood of an orchestrated slow-down of the Asian engine that has sustained global growth almost on its own; the European sovereigns and their interconnected debt networks, still barely hanging by a thread; U.S. unemployment that – depending on the survey, time of day, angle, and definition – seems to be somewhere between 10-20% and holding firm; the continuing tension between inflation and deflation, in which inflation is quickly gaining the upper hand though not necessarily in a good way; a now apparent double-dip in U.S. real estate; and, finally, a multitude of ways in which all of these variables are related, much like dominos lined up in a row.
Although the “healthy pullback” interpretation would resonate more convincingly in the absence of described risks and challenges, or in the presence of fewer of these, or at the very least a less mountainous aggregation, the debate is ultimately senseless anyway. As the market has all but ignored the economic and political climate for many months now, and as values seem instead to have been driven by a massive liquidity influx (QE2) compounded by high-frequency trading that is inherently oblivious to fundamentals, it is incumbent upon market observers to assess their positions on that basis alone: Which is to say, market outlook must now be a matter of QE rounds and the anticipation thereof.
Within the coming months (or maybe weeks), the Fed will, as before, begin to signal its intention with respect to monetary plans. One way or another, the market will react. If the signal is for continuing liquidity infusions, the long-term rally – with “healthy pullbacks” notwithstanding – is likely to prevail. At a minimum, downward pressure will be alleviated. If plans are otherwise, however, we will revert back to fundamentals, and that may not be pretty. In either case, there will as always be ripple effects into all capital markets – venture capital, private equity, corporate borrowing, consumer credit, IPOs, and strategic M&A. For now, the attention of all of these constituencies should be well focused on Washington, and in light of complexities that have lately escalated, maybe more so than ever before.