The bad call was the header of my last week’s post, “The wrong kind of stocks are leading the stock market to records.” What kind of stocks might those have been? They were defensive stocks … healthcare, utilities, REITs. Why was this bad? It was a sign the smart money was fearful. And that’s not good.
I postulated that was a good thing as this cautionary comment was but a new brick laid in the ‘wall of worry.’ The wall has remained in tact and is growing again even as many of the popular indices are moving to new all-the highs. THIS HAS BEEN GOING ON SINCE THE BOTTOM ON THE S&P 500 IN MARCH 2009 … OVER 10 YEARS AGO. None of the of the frothy sentiment markers are flashing red, not even amber. This is the most unloved and disrespected secular bull market ever.
One of the reasons is that so many of the strategists and pundits on Wall Street missed the blast off away from S&P 666 (and missed it by a lot). It has been very difficult for them to get back to a bullish argument. So they continue to be cautionary, hoping for a big wave on the downside to allow them to save face and find a reason to be more constructive. That big wave on the downside never seems to come or last long enough to allow them back in. Generally speaking when that big waves come they will probably remain cautious believing the market will head even lower.
Another cause may be ‘recency bias.’ Recency is a cognitive bias that convinces us that new information – which is more recent – is more valuable and important than older information. As an example, many people looking in the rear view mirror, feel events that are similar to those of 2008/2009 represent a real threat to our market in the near-term. This is as opposed to them looking back 50 or 100 years for guidance on what the market might do. I know what the Dow did over the past 50 years. It went from 750 (10/1/70) to today’s (Friday 11/8) record intraday high of 27,695. This is not to downplay the fact that there were major downdrafts along the way including the financial crisis.
So, why not “… celebrate the Dow record too much?”
Well, our favored protagonist from last week’s post, Mike Wilson, Morgan Stanley’s U.S. chief equity strategists, says we should not celebrate the bull market because he believes “… the next decade could be a dismal one for both stocks and bonds.” He reasons as follows: the market has performed great the past 10 years (the S&P 500 up 13.8%). As this is way above the long-term average for any 10-year period he believes we need to revert to that average, meaning in the case of a 60/40 stock/bond portfolio the investor is looking at about a 4.1% compounding over the next 10 years. Ouch! He’s doubling down on last weeks negative remarks. He is a victim of recency bias, plus he is cherry picking a 10-year period where the S&P 500 had to more than double just to get back to and break out (in 2013) of its previous Y2K all-time high of 1550. More importantly the 20 year return on the S&P (1998 to 2018) was only 4.5% compounded, not so hot as the range of these returns averaged, longer-term, between 4% and 8%.
As we have said before, “market predicting is hard”
Some who try may get it right once (mostly due to luck) and most of the time they end up being one-shot wonders … their one call gains big notoriety. They become constant figures in the media but their advice is generally useless going forward. None the less, that drive to make the ‘big call’, catch the bull rolling over, is insidious. If you catch it right it can lead to significant fame and fortune in the short-term. That may be what we are seeing here with Mr. Wilson’s continued negative drone. If the market tanks, he can say ‘I told you so.’ Voila! A star is born.
What does worrisome really look like?
It looks like this … In the period between 1973 and 2016 the best ten-year rolling return on the S&P 500 was 20% in the 10-year period that ended August 2000. This came at the top of a secular bull market that began in 1982 with the S&P opening the year at 117.3. BTW, this bull suffered the exact same disbelief, fear and denial that our current bull is suffering. That disbelief, fear and denial was bolstered by a tremendous decline in the fall of 1987. As I pointed out earlier it ended in March 2000 at 1550 (up 13 times in 18 years). Unlike the last secular bull that we experienced this one has been going on for 20 years and the S&P has only managed a double and so far, there is not even a trace of jubilation evident with investors. Nobody is celebrating!
Why Mr. Wilson’s comments, as useless and lacking in perspective as they are, continue to see the light of day is no mystery. CNBC and other media know that fear and bad news sell. They are in the ratings business, not the enlightenment business.
P.S. And the hits just keep on coming, like this one from Barron’s Randall Forsyth (“Stocks keep hitting record highs. Where to find values”–you need a subscription to view) a perennial target of my scorn. After pointing out how well domestic equities have done so far this year he offers up alternatives on where to put new money. He assumes, and rightly so, that many of his readers are underinvested and would like to participate but are leery of U.S. Equities (this is something he contributes to weekly). He quotes reasons for the great market we’ve enjoyed from Nancy Lazar from Cornerstone Macro: “No recession is coming, and the global slowdown is over. Capital spending on productivity-enhancing software is growing more than is appreciated. Rising productivity, along with increasing labor-force participation, is expanding the economy’s supply side. And, finally, the headwinds from trade tiffs are abating, just as the lagged effect of monetary easing over the past year is kicking in.” These are all elements of the ‘wall of worry’ Forsyth has helped build and reinforce over the past ten years.
“Against this favorable economic backdrop, value stocks have never been so cheap relative to momentum stocks, according to Bank of America Merrill Lynch’s equity and quant strategy group, led by Savita Subramanian. The last time value stocks were this inexpensive was in 2003 and 2008, years in which they went on to outperform momentum stocks by 22 and 69 percentage points, respectively.” This makes eminently good sense to me as a place to put “late to the game” dollars today.
Then Forsyth flips us completely into left field with a comment by Jim Paulsen, chief investment strategist at the Leuthold Group … “If President Donald Trump succeeds in his goals of reducing the U.S. trade deficit and cheapening the dollar, while other policy officials lift bond yields and inflation, investors should buy foreign stocks and dump U.S. shares … The long underperformance of non-U.S. stocks “has made them unloved and underowned by most investors, and they now offer considerably cheaper relative valuations,” he writes.”
What’s an investor to do? Don’t Listen! ( … except to the part I agree with)
The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions. These are not meant to be construed as recommendations to BUY or SELL. All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.