Introduction
If you read CNBC's website these days, you will notice that there are articles saying that the market has been pummeled and is now ready to go up and there are others that say it is just the start of a longer term downtrend. Who is right?
Well, there is no way to know that for sure, and we have a president in the USA who has shown no aversion to moving a market with a single tweet. Expect the unexpected.
However, when looking at the stock market these days, many of us (including myself) are trying to figure out the best gamble to take in the market - and it is very much a gamble. Anyone who says its not a gamble is lying to you.
My belief (and its not financial or expert advice) is that there is more pain to come in the stock market. I may be very wrong, but I have reduced my own equity holdings significantly over time because there are certain things that really scare me about this market. Here are the things that scare me:
1.ETF Zombie Money Worries
There are nearly $5 Trillion dollars invested by Joe Public in global ETF's (exchange traded funds). I call that "zombie money" because it is money that just follows ahead in a large herd without independent thought.
What is really troubling to think about is what happens if/when good chunks of the zombie money become scared and doubts the logic/path of continuing to blindly be part of the travelling herd. If that happens and you start to see a significant unwinding, you may have +/- 2 trillion dollars exiting the markets (that means less money bidding for your shares, so it should mean lower share prices).
The thing about the average Joe Public investor is that they really have no idea what they are doing - they have just been watching gains for years and feeling good about the idea of investing. That can still be great for markets when they put their money in and just blindly leave it there because a rising tide lifts all ships - but the thing about Joe Public is that when fear hits it's uninformed fear, blind fear, and that is the worst kind of fear. Having no idea what is going to happen next and worrying that the "market may go to zero" (which is something that I actually heard many times during the 2008 crash) is a toxic fear that triggers a flight response.
For those who are crypto-currency investors as well (like myself), these ETF zombies are essentially Hodlers. We saw what happened when a market downturn hit and the response of the Joe Public investors to that.
The worrying thing is that we are not talking about a small amount of money $5 trillion dollars is a monstrous amount of money. Any significant unwinding of that amount would have a very significant effect on share valuations.
Those investors are about to receive year end statements that show very real declines, but, more worrying, they are about to see that this December was the worst since the depression era. I do not believe that investors will, en masse, have the fortitude to sit calmly through that. People will exit the market and when that happens contagion can take hold.
You have already seen signs of the fear - whenever the market has been moving up early in the day lately, you have generally seen the gains erased (with Wednesdays 1,000 point gain being the notable exception). That is profit taking or money searching for a market exit I believe.
In the face of what appears to be a slowing growth and profit forecasts, a withdrawal of government support for the markets (quantitative tightening) and looming trade and political issues, I have a very low exposure to to stock market right now. I may not be right about the outcome (because its impossible to guarantee that), but I think that I am right about the risk.