Can't stop deflationary pressures, but markets don't care
Basic thesis, the markets are driven long term by price accretion or . Over many years the miracle of compounding takes over and we (prices, markets) begin to behave on log scales. So the moves in the markets (Dow/S&P) are not unusual when examined over longer periods of time, prices must naturally go up (if exists) and on the sorter term linear view these tend to look exponential. Also, the current state of the jobs market is operating at about its peak levels with monthly jobless claims falling under 300K. We may be able to hangout in this region for another year to 18 months, but (on a longer time line) the end is near. Finally, the Federal Reserve's interest rate policies are what they are, but as can be seen by CPI (can be manipulated by the Government, by adjusting the components), a zero interest rate environment has been good for the markets and jobs, but have not done a darn thing for (we are still deflating or stag-flating). Combine that with Europe's current state and we are likely to continue for a while longer.
The longer term performance on the markets can be seen in the bottom chart. Plotted on a log scale, it is nicely seen "the miracle of compounding". This is the mechanism of , but in the current environment (deflationary pressures) we may not be able to reach back to the mean line. Examining the relationships of market direction to , most of the normal market gains are during periods of heathy . Stagnant markets (on a log scale, but still meagerly positive slopes on a linear scale) are in healthy deflationary environments. "Market events" such as spikes/drops in the rate highlight divergent events in the markets, with lagging interest rate responses by the Fed and corrections back to the mean line on the lower chart.
So what to do: Stay the course...Keep picking winners in the short term, scaling into cash over the next year and get ready to buy in 2 to 3 years when an eventual correction comes. Could we see Dow 20,000 in 2015, yes not a stretch of the imagination. However, log scales are deceptively powerful. A 25% correction (easy to get in a recession) from 20,000 takes you to 15,000, and are barely noticeable on the bottom chart. This is a huge physiological blast for the average person (because numbers are "BBBIIIIGGG" and scary) and presents great opportunities.
So if you see it coming (and can actually act...rather than freeze for a couple of months), rotate towards cash, or buy some puts, or go short for a few months. Laugh at the hysteria, relishing the buying opportunities.
Jobless claims: Appears that for the US, ~300000 jobless claims per month is about as strong as the economy can get. Will probably see this tick-up over the next couple of months will oil's drop. Impressive still considering population growth
Interest rates: ...and even with 5yrs of easy money for large financial institutions, and trickles down to us little people via CC , mortgage, and loan interest rates, we still have a potential deflationary economy.
Markets: I find the moves in the markets more benign when you look at them on a log scale. This is really due to the miracle of compounding (mainly driven by core ). Examined in this this light, the moves in the dow are still catching us up to the mean line. However, if you combine this with the potential deflation, might not make it back to the standard run rate.