The Asinine “Stock-Picker’s Market” Meme

The most fashionable meme circulating in the financial press these days is that 2014 will be “stock-picker’s market.”  According to the purveyors of this asinine idea, the outrageous gains in the markets in 2013, (such as the ludicrous 29.6% gain on the S&P 500, or the stupefying 37% gain on the Russell 2000), will slow in the present year, meaning that only the savviest money managers will be able to show outsized returns for their investors.  The market will not collapse, mind you, according to the self-interested purveyors of this idea, but neither will the manic bull run continue.

In other words, there is no need to panic or to doubt the sustainability of last year’s preposterous gains.  The only thing you need to worry about, dear investor, is whether you have parked your life’s savings or your retirement money in the hands of a top-notch and savvy money manager.

The obvious problem with this silly idea, which can be heard or read almost daily, is the following chart:


Looking at this chart, does it appear as though there has ever been a time in the last 50 years when an absolutely manic spike in the S&P was followed by a year of mediocre gains?  No?  Well, then that means that not one money manager that is alive today has ever seen the market behave as they are now predicting it will behave.  Not one of them has ever lived through a market that has seen a manic rise followed by a year of average or tepid growth.   The same is true of the Dow, Nasdaq, and Russell 2000.

The purveyors of this meme are thus not making predictions about have any historical precedent whatsoever.  In fact, they are making a prediction about this year’s gains that is contradicted by the historical evidence.  Even a cursory glance at the chart above will tell you that 2014 will likely either be a year of outrageous gains or outrageous losses, not so-so growth or so-so losses.  The business cycle is as plain as the nose on your face in this chart, and a business cycle as vicious as this one is not likely to produce a boring year that is ideal for “stock-pickers.”

To top things off, any money manager worth a farthing knows that we currently live in a world of high-frequency trading, record margin debt and carry trading, extreme FX volatility and massive central bank intervention.  Any money manager who thinks that a market with these characteristics is likely to behave in a boring, “stock-picker’s” manner is either crazy or dangerously naïve.  Parking your life’s savings with such a character is absolutely insane.

This is not to say that it is impossible for the market to behave as these money managers predict.  The Fed’s current monetary experiment has literally no precedent in American history, and literally no one can predict how this lunatic experiment will eventually play out.  The point is that the so-called “professional” money managers that are gambling with your money in this crazy market are making predictions about the performance of the market that are not based on historical evidence or economic theory.  They are making this “stock-picker’s” market meme up out of whole cloth in a desperate bid to convince you not to pull your money out of this market.

Another glance at the chart above should warn you that the business cycle is alive and well in America, thanks to the Fed, and that downward moves are quick and devastating. The time has come to ask yourself whether it is wise to entrust your hard-won savings to a character who bases his predictions about market performance on his gut (and salesmanship) rather than market history or economic theory, or whether it is wise to lock in the 30% gain you made last year and laugh all the way to the bank.