Lock step equities: leading where?
Friday, April 4th, 2003
Stocks are trading up and down in relative unison, an effect last seen during during major free-falls like the ’87 crash, the ’97 Asian crisis and the ’98 Russian debt debacle.
The market rallied sharply after each of these tumbles and periods of lock-step trading. Does this mean we’re going to rally big once the Iraq war is resolved? Or is the correlation with inflection points rather than bottoms, which might instead mean we are next headed down?
We are, in the big scheme of things, still perched atop a 19 year rally, and may not have factored in swelling deficits, exhausted consumer borrowing power, a coming housing slump, and/or looming baby boomer retirements.
Most importantly, we may have yet realized that the 19 year equity rally may have been powered by nothing more than falling interest rates. The future value of money was rising for the last 19 years. Is it any wonder that stocks, which we buy because they will generate future profits, were rising in value too? As the Fed’s ability to lower rates comes to an end, that trend is, by physical necessity, over.
I guess another possibility is that we are inflecting out of a rise into a plateau, the kind of bump and grind that we saw from 1965 to 1984.
See the Dow chart or click more for correlation chart.