Preparing for the Next Stock Market Move

Reviewed: October 22, 2014
By FinanceWeb

When the markets rose throughout 2014 following on a long uninterrupted positive run, many investors sounded occasional alarms. They noted economic trends, U.S. and world news, and events that should have made the market stumble; instead, they watched as the market barely blinked. Even in hindsight, the trend is surprising. One must consider that the market rose steadily through the near destruction of the government in Iraq and the rise of ISIS. It persisted through the Soviet incursions into Ukraine, war in Ukraine, and Western sanctions against Russia. It prospered despite turmoil in Syria and Lebanon and war in Gaza. Any of these events and the gloomy news that accompanied them could have derailed the bullish run.

Some Notable Economic Trends

In economic terms, investors note the rise of U.S. oil production, weaker demand for crude oil, the softening of the EU economies, and an overall lower than expected rate of global economic activity. Using hydraulic fracturing and oil shale technologies, the U.S. has achieved record highs in domestic crude, and the prices of oil on the world market have fallen to recent-year lows. One must also account for the strengths of investment power such as the spectacular Alibaba IPO, and the continuation of fundamental growth trends. One must note the continued exponential growth of Smartphones, mobile computing and the advent of online payment technologies. These are tools that pose broader consumer participation in U.S. and international economic activity.

Defining the Market

The current stage of the market seems difficult for experts to define. Some call it a correction; some suggest it is the beginning of a bearish market. Without regard to labels or the accuracy of assumptions, it seems clear that if blue chip and other high-value stocks continue to fall or stay flat, there will be impressive opportunities when the market moves forward. One trend line that is worth noting, activists have urged some leading companies like Apple to be proactive and buy back large blocks of stocks. Buybacks can provide immediate benefits for shareholders as the price of the stock tends to rise on the news and the lower availability. An example is Apple and the urging of activist’s stockholder groups.

Follow the Money

While it can appear to be a retreat from stocks, the growth of bonds has the certain logic. It is also worthwhile to note the number of major investment funds that will leave greater shares of available assets in cash reserves. One can view this pattern as hesitation or a re-positioning of assets for finding gems among the next market move. When assessing this asset to reserve ratio, one can look for a change in that pattern as a sign of emerging market conditions. A significant change in the cash reserve figures among mutual funds, institutional, and large investors would signal a perceived change in the market.

Moving forward: Government Action

Government action is another important aspect of the current market and potential for the next move. The U.S. Federal Reserve may act on some interest rates. In Central Europe there are growing pressures for government-led economic expansion. The large economies currently do not move in the same directions with Germany’s austere conservatism out of sync with its major partners. For example, in Italy and France sentiment is strong for active government expansion.

Benefits of Consumerism

The energy sectors are factors in longer term sustained market improvement. Russia and China have entered into agreements for natural gas that involve significant investments on new infrastructure and an extensive pattern of economic cooperation. The United States will decide on the movement of Canadian tar sands that will bring an additional source of fuels into a crowded market. Lower energy prices can translate into greater, and more diversified consumer spending in the U.S. and Europe. The prospects for expanded hostilities in the Middle East raise a note of caution that has been muted so far by the abundant world supplies of crude and natural gas. However, the diversion of the world’s leading economies to a war footing will reverberate in the markets as it could potentially thwart government programs to expand economic activity.