It is pretty obvious that we have begun a correction in equities. It is impossible to say how long or how deep it will be, however I think it is still a correction within a longer term rising equity trend. There is a lot of cash on the sidelines and interest rates are not high by historical measures.
There is the beginning of competition to equities for cash flows from the real estate market. This means Equities are no longer the only game in town. As mentioned a number of times money flows. Money flows between four major areas:
Equities are still the biggest draw in the funds flow arena. Very orderly no upside panic – yet.
Commodities are divided – metals and mining are in a two year bear market (out flow) with real estate being in an early “in flow” stage. Oil/energy is at a high price but supply is growing rapidly from fracking. There is potential for a significant drop in oil prices in coming years. This would make equities even more attractive and lead to panic buying. A drop in energy prices would expand profit margins for corporations as well as individual pocket books.
Bonds are in an outflow stage that could turn into a panic selling stage as interest rates rise. How fast will interest rates rise, is the only question here.
Cash is growing as money leaves Bonds but doesn’t feel sure it wants to be in Equities or Real Estate. In time greed will win out over fear and money will leave cash and rush to Equities and real estate. Of the two Equities will outperform real estate. Real Estate has the drag of rising taxes as cities and states struggle with budget cuts from the Federal Government. The Federal Government is actually progressing in making itself slimmer however there is a lot of pushing expenses back to the states. Which in turn means the states push it on to taxpayers in income tax and sales tax but largely through property taxes.
We have not seen the Greed stage in the stock market yet and therefore corrections/pullbacks in equities are for buying. Nor have we seen the Panic selling stage in the bond market. We will. Be aware… It is a dangerous world out there. Mama was right.