Spending a week away with no TV or newspapers and only limited Internet access, as I did recently, gave me lots of time to think about the present investing environment, where there is mass confusion in all markets. Unusually strong crosscurrents make it difficult to ferret out what participants are thinking or anticipating.
However, I'll take a stab at it by reviewing various markets -- stocks, bonds, currencies and gold -- and considering whether my expectations need to be adjusted. First, though, a look at the innards of those crosscurrents.
Despite the market destruction of 2008, there is still much speculative money chasing any and all markets. Thus the "noise-to-signal" ratio might be quite high for an extended period. Which is to say not that all market action should be ignored but that it might need to be taken with a little less seriousness, especially in the shorter term.
In fact, the noise-to-signal ratio might be much higher than in the past. An immense amount of money follows momentum-oriented strategies. Although momentum feels good when it's at your back, a quick change in direction can cause you a fair amount of grief. I'm not sure as to the ramifications, but I'm just going to factor that concept into my thinking a bit more.
Now for a look at the markets individually.
The stock market
The fact that it's been laboring and unable to make progress on good news is something I've been discussing since October. My feeling then that the market might be rangy, at best, was more or less what has transpired, with that inability to rally leading to the recent slide. This decline "tracks" the script. (If only I hadn't been stopped out of my Standard & Poor's 500 Index ($INX) short.)What I do find surprising is that so many stocks that you might have wanted to own were smashed just as hard as, if not harder than, stocks you might have wanted to be short. To pick my favorite example of both, among a list of others: In the past two weeks, Research In Motion (RIMM, news, msgs) has actually behaved quite well while Microsoft (MSFT, news, msgs) was pounded after a legitimately sensational earnings report. Bottom line: For months now, it's been very difficult to make money on the long side of the market. (Microsoft publishes MSN Money.)
As for the multitrillion-dollar questions -- where will this decline end, and what will come next? -- I don't have good answers. I suspect that after this "correction" has passed, we could easily see a failing rally instead of new highs, but it's difficult to hold a big opinion.
Part of the reason stocks have thrown a temper tantrum is that the Fed, for the moment, is talking the talk of ending quantitative easing. If and when that changes (toward more QE), which I expect it probably will, who knows what the market might do. Stocks are not cheap, especially given all the problems we face, but if the Federal Reserve turns on the spigots again, stocks could benefit. I believe that, for now, the wise thing to do is to watch the decline and see how the sorting-out process proceeds.
At some point, there might be an opportunity to trade high-quality companies such as Microsoft and a handful of other tech stocks from the long side. And perhaps, down the road, some shorts will set up. I still believe this year might be one in which stock pickers on the long side or the short side will do well as we see a market of stocks instead of a stock market, although thus far that is not what has transpired.