Market sentiment seems to be favoring the bears again. My cursory research indicates that 65% of investors are again thinking about an impending decline while the other 35% are still cautiously optimistic. It's only seldom in these last few weeks that I came across the occasional person who insists that the bull charge, which began in 2002, shows no signs of relenting. Just the fact that there has been a noticeable increase in the past few weeks (even before these past few days of declines) in the volume of discussions and analysis regarding how to recognize a bear market is coming, how to prepare for it's arrival and what to do when it gets here, signals to me that investors are getting skittish. The funny thing is that it's almost a universally accepted fact that no one can truly predict a bear market turn.
I gave a warning a couple weeks prior to the last contraction that I thought one was coming. That quick downward slide in fact happened. I'm now going on record again as declaring that the bear is coming for another swipe. I expect that this time the cut will go deeper and bleed a bit longer. (Indeed, I originally wrote this post after Tuesday's sell-off, but already this downturn is longer and deeper than the last). Last time around, I sent you that message based solely on gut instinct with little else to back it up. This time, however, I'll clue you in to some of my thinking.
From my perspective, the major economic indicators are badly muddled. It's extremely difficult to know who to believe. Federal Reserve Chairman Bernanke is of little use in painting us a picture as his words continually double-back on themselves. He says inflation is slowing but it's still a risk, while he indicates that tightening inventories and labor pools will most likely drive prices upward. He doesn't seem to think that food and energy costs will factor into inflation much. I wonder what planet he's living on. A quick review of this New York Times articles about him shows that he's been spewing the same tag lines since the beginning of this year.
Tensions continue to mount between labor unions and employers. I see a serious round of union busting on the horizon as the various political power brokers struggle for position before the primary elections. Union busting is in vogue again and it shows no signs of relenting. The increase in the minimum wage will have a chilling affect on business growth, profits, hiring and investment as companies shift budgetary allocations to accommodate the increased expense. As the expense of maintaining domestic employees continues to rise, more major corporations are looking to China, India and South American countries as avenues of cost reduction. Nowhere in the legislative process is their ever mention of requirements for offshore employers to meet American labor standards.
More and more, mergers and acquisitions are being characterized by large strong companies buying up operations that are on their death beds. This is a means for quick revenue growth. By maintaining existing accounts while slashing workforce a year of profit increase can easily be had, but after the dust settles, truly nothing has been accomplished. Organic growth is at a near standstill in many sectors and a majority of balance sheets have reached their saturation point. With little room to expand profits in the domestic market place, those companies without a tremendously aggressive offshore business strategy are doomed to mediocrity.
We're saturated with value. There's little upward room left. The big growth has taken a not-so-slow boat to China and we're already feeling the pain of that. The American stock markets will not stand by for long and be satiated with quarter upon quarter of stagnant returns. As I see it, there's only one way that we can continue to see the acceptable returns on domestically oriented investments which we've become accustomed to and that is to endure the pain of a 15% to 20% value reduction.
For me, it's just a question of how soon will it happen and who's going to set it off. Taken these past few days into account, the wheels may already be in motion.
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