Is Fear Driving Stocks Higher?
05/14/2013 8:30 am EST
MoneyShow's Jim Jubak shares his insights on what he thinks is really driving the stock market higher, and what that may eventually mean to investors in the weeks ahead.
For the week ahead—well, for as long ahead as this lasts—you need to keep watching those five-year highs or those all-time highs.
The US market really went first. We hit an all-time high on the Dow, all-time high on the S&P, moved into uncharted territory. But if you've been focused just on the US markets, you've missed the fact that the German market also hit an all-time high. Germany, right at the heart of the Eurozone, which is not growing at all. Germany, all-time high.
Japan, this past week, hit a five-year high. OK, it's Japan. Five-year highs are not really terribly high in Japan, but still nonetheless you're talking about Japan at a five-year high.
Everywhere you look, markets are moving toward, you know, territory that they haven't been into in a while, or ever. The common explanation is to talk about greed and fear, and you know that greed at this point in the market really drives people to stay in the market.
I think you need to recalibrate that a little bit for right now, because what I can tell—and now that I also manage a mutual fund, I'm sort of on the other side, so I feel what money managers feel—I think this is really mostly a fear and fear market.
Yes, people would like these returns, but really after the last couple of years, when every time you moved out of the market you got clobbered by the indexes, and professional money managers have constantly been coming up to their investors and saying, "Yeah, I know I trailed the index again," nobody wants to move out of this market.
Nobody wants to go back yet again, if this rally continues, and say to their investors, "Look, I thought the market was topping, so I moved to cash and it didn't top, and therefore I'm trailing the indexes." That's what I think is driving this market-not so much greed, as in "I want all I can get, I'm willing to overlook everything wrong," as in fear: "I don't care what the bad news might be; I'm going to stay in this market until I've convinced that it's turning in the other direction, because I'm really afraid of getting clobbered by the indexes again. I don't want to have to make that explanation to my boss or to my investors."
Think about what that means for the dynamic of the market. You've got a lot of people in this market, not because they're convinced it's a great market, not because they think the valuations are good. They're in it because they're afraid to move out. They're not convinced, they have no conviction, and that means that they're constantly staying in while they look at the exit.
They're not necessarily moving to the exit. They're afraid to do that, but it means that if there is something that really convinces them that the market is going to move in the opposite direction, you've got a lot of people with no conviction who are going to head to that exit as soon as they can. Because after all, the point is to try to beat the index, and when the market is moving up that means you stay in and when the market starts to go down you move out faster so that you can beat the index on the way down.
I think this means that we're still headed higher until we get some bad news, and then I'm worried about any turn to the downside being a really quick turn and having a lot of lack of conviction pushing people out of the market. So yes, we're moving toward five-year highs, all-time highs, but there's not a lot of conviction here. I would be careful on the downside.