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1/18/2016

Yes, we know…it’s been a while for the market doctor team.  But the stories all remained the same for several months last year…is the Fed going to tighten…not tighten.  And the answer of course is…big deal.  If you would have been following our commentaries earlier last year, you would have not been surprised by a 25 basis point hike and that the likelihood of further significant tightenings was low and that the long end of the treasury curve would probably not fall out of bed….etc.

Well, now we’re back because what has transpired is one of the worst starts to the year for equities since the great depression.  The causes are many and include, the precipitous drop in the price of oil, a china bubble bursting, chaos in migrations from the Middle East to Europe, an election year in the US….and don’t forget, the bubble that has been created in US equities due to ridiculous monetary policy over the past 8 years.  In case you didn’t see any problems in US Stocks…just consider a metric that puts things in perspective.  That being…a vast majority of gains in US Stocks were attributed to only about 10% of companies, mostly in mega capitalization.  Can you smell speculative bubble creation?

So, just to reiterate…if you would have been following the doc’s team, this drop in stocks should be no surprise either.  The point to make now is…where do we go from here.  All we can say at this junction is that if the major indexes can somehow drop another 2% or so from here, things could get very ugly on the downside….and this is not out of the realm of possibility.  Unfortunately or fortunately, depending on your demeanor, a short-term painful event such as continued double digit losses for the major indexes, could provide a needed cleansing to asset allocations.

Once again, the bottom line to this highly volatile scenario in equities, is that zero rate monetary policy induces mal-investment across a spectrum of assets.  Eventually imbalances are drawn back to equilibrium.  That equilibrium is lower for stocks.

If you want a good perspective on the state of the markets and the economy, check out this recent video of Jim Grant and his views.  He’s spot on.

http://finance.yahoo.com/news/why-fed-backtrack-rates-2016-125920716.html#

 

Stephan Kudyba (MBA, PhD)                      THE MARKET DOCTOR

 

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