S&P falls for two weeks as results fall below expectations

The S&P 500 has almost doubled since the lows of March 2009 but stocks have failed to meet analysts’ profit forecasts for the past three quarters, the longest losing streak since 2000 for professional forecasters.

For the past two weeks the S&P has declined by one per cent on disappointing results, although it is still up 4.9 per cent for the year to date. Is this the start of a market reversal?

Bear fear

Bears are far too scared to risk making this call, having gotten the market dead wrong for 18 months in many cases. The problem is that all bears are right in the end.

ArabianMoney certainly way underestimated the impact of the scale of market intervention by the Federal Reserve. Old hands like Warren Buffett jumped straight into bed with the government and managed to stiff Goldman Sachs for a few billion in the process!

Yet Buffett still missed the silver train as it pulled out of the station, and that is perhaps surprising because he did double his money in silver in the late 90s. He also stumbled straight into the 2008 crash with a huge stock portfolio. Nobody gets it right all the time. At any age you can learn from your mistakes.

Will the S&P now trade in a narrow range? Perhaps with oil, gold and silver stocks outperforming? Or will an over-optimistic Mr Market take a big tumble as in 2008? Will there be another chance to buy stocks at a 50 per cent discount?

At the end of the day the stock market is a profit discounting mechanism. As our old friend Chris Mayer pointed out last month we are now seeing ‘Peak Profits’ (click here). That tends to suggest it will be all downhill from here, and Chris got the rally right last year.

Black swans

Meanwhile, there is a whole catalogue of negatives if you care to look for them: higher and higher oil prices (click here), imported inflation, the continued US housing and mortgage crisis (click here), a dependence on over-heating emerging economies for new business (click here), the collapse of many Middle Eastern export markets (click here), recession-level US auto sales (click here) and the massive budget deficit and dangerous levels of debt (click here).

Only the brightest of Wall Street could manage to spin this into an argument to invest at peak valuations. But as we have said for far too long, what goes up must eventually come down!