September 12th, 2008

When Will Market Predictability Return

The market these days looks much like a rushing river making eddies and whirlpools as it streams over the rocks and boulders hidden beneath the surface. You know that the current flows downstream but the river just doesn’t seem to be moving through those rough waters. Many branches and leaves flowing with the current get caught in the whirlpools; some finally break out and others vanish beneath the surface only to reemerge further downstream.

My stepson, a kayak enthusiast, talks of the challenge in “surfing” these whirpools, of being able to stay on top of one of these eddies and not move for extended periods … if you know what you’re doing. If you don’t, there’s a good chance you’ll flip over.

There are so many moving pieces buffeting today’s market: credit and financial crises, increasing unemployment, threat of inflation, ballooning budget deficit, rollercoaster $US, threat of worldwide recession, relatively high oil and commodity prices and, finally, “change, change, change” in the domestic political landscape. Consider these rocks and boulders beneath the surface. No wonder the market river is roiling. The best you can do is to protect yourself (unless you’re a daredevil) and avoid getting flipped or capsized.

When will this end? I even more firmly convinced its not going to be until a couple of months after the election and innauguration. Putting politics aside, everyone must admit that the past 12 years (especially from the Lewinski incident through tech bubble burst and 9/11 to housing bust and credit crises) has been difficult. We don’t necessarily need “change” but instead we need some calmer waters. The inauguration will give us some of that regardless of who wins the election.

The stock market uses fundamentals and economics for fuel but its course is driven by investor psychology. And to some extent, the market is on the verge of having a breakdown. What it needs is some rest, some quiet and some therapy. A new administration, whichever the winner, may be just what the market’s doctor ordered.

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