Treading Water

Treading Water

Remember during swimming lessons, one of the tests for completion was to tread water for a set period of time? It was probably only a 2 minute test. However, for both the swimmer and the observer, it was tiring, and it felt like an eternity.

Most major U.S. stock markets have been treading water in 2014. It has seemed as if markets were going to lose energy and sink a few times, only to pop back above the surface and gain a bit of steam. That steam, however, has always ended up being short lived. After four and a half months of dipping and bobbing, markets haven’t moved much from where they closed out 2013.

All of this dipping and bobbing—“consolidation” as market insiders call it—is normal. The almost unabated 30%-plus advance that we enjoyed last year was a bit more abnormal. All of the treading of water that we have done this year seems appropriate when taken in the context of last year’s gains.

Is the market just rekindling its energy for a burst higher, or will it turn into a tired swimmer who eventually succumbs to gravity and sinks? We can never know, but it seems like a mere pause to us. With a growing economy, expanding earnings and accommodative monetary policy, the environment is right for further gains. Of course, the market does what the market does, and a decent environment isn’t always enough to push stocks higher.

When we look at what causes major declines, however, we don’t see anything that causes us too much concern. Overvaluation was a catalyst for the tech bust. There may be a few frothy stocks and industries out there, but the market is not wildly overvalued like it was during the tech bust.

What about debt and leverage, two of the major catalysts for the credit crisis and Great Recession? Household debt service payments are relatively low by historical standards, and corporate balance sheets are pretty healthy. Runaway inflation like the 1970’s? Nope. Deflation like in the 1930’s? Nope.

We have midterm elections coming up, and there is the issue in Ukraine. China and Europe are also a bit weak. We don’t currently see any of these known issues as being severe enough to end this bull market. While Europe and China bear attention, midterm elections and Ukraine, even if they escalate, are probably not enough to cause more than a quick dip below the surface. In short, we wouldn’t get out of the pool. Things look okay. Just keep swimming.