Sunday, March 18, 2012

Global Market Forecast: Conclusion

Global Market Forecast: Introduction
Global Market Forecast: Sovereign Debt Review
Global Market Forecast: United States Economy & Stock Market
Global Market Forecast: Conclusion

The goal of this forecast was to provide broad look at the stock market in terms of whether an investor should enter the market today by reviewing the growth outlook of the global economy as well as the strength of the US economic engine.

After the extensive review of both public and private balance sheets for the largest countries around the world it becomes clear that the global economy is in the early stages of deleveraging.

Paying down debt and reducing credit is inherently a (short term) drag on an economy as the benefit of the debt incurred in the past must now be matched with a sacrifice today.  Future economic growth was pulled forward over the past three decades and the bill for this continuous boost to the global economy is now here.

If the stock market was touching new lows and sentiment was at extreme lows as seen during the March 2009 bottom (when there were only 2% bulls on the daily sentiment index) the market would look much more attractive even in the face of slower economic growth.

However, with all these headwinds and hurtles to cross as the world continues this enormous deleveraging process, the market is now closing in on all time record highs and sentiment is at multi-year highs.

This should throw up a cautionary flag for new investors looking to put money to work in the market.  Can the market run from overpriced to extremely overpriced?  Absolutely.  It has happened time after time throughout history.  To begin 2007, it became very clear how much of an impact the subprime mortgage crisis was going to have on the economy yet the market rose for almost another full year before topping out.  It ran from overpriced to extremely overpriced.

Do I want to put money to risk in that sort of an environment?

No.  In fact, I would prefer to begin buying options (called puts) which are extremely low in price when the market sentiment and prices are high.

The following is this week's cover in Barron's magazine.  For a complete analysis on the future direction of real estate prices please see 2012 Outlook: Residential Real Estate.

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