” … The Good News Is Already Baked Into Stocks.”

–Is it? Don’t buy this argument.

–– A more elevated view and longer-term perspective yields an entirely different picture.

–Stimulus and low interest rates world-wide seem under-appreciated as long-term drivers for the economy.

–Using the analogy of baking a cake, we’ve just made the batter.

The World According to Forsyth

This was the take of the often acerbic, seldom correct, Randall Forsyth in this week’s “Heard on the Street ” column in Barron’s. (you will need a WSJ or Barron’s subscription to read) This must surely be the case now that Congress has finally reached agreement on a new $900 billion round of stimulus … something we’ve been holding our breath for for the last thirty days. The market must certainly be ready to crack now that all the good news is out. Right?

Maybe. There is no question that the market is overbought. Normally you would get a pull back, a pause that refreshes, before you move higher and I do believe we are going higher (maybe much higher). I will get back to this point a little later in my post. Question is, at what level will this correction or, even worse, cyclical bear market begin? My contention is that too many people, investors and pundits spend way too much time and energy pondering this issue, focusing on the short-term, while spending little or no time on the long-term outlook … the bigger picture.

Peering into the 10,000 foot view

Below is a bit of insight from two very smart investors, Josh Brown and Barry Ritholtz of Ritholtz Wealth Management LLC. (Excerpted from 12/20/20 Barron’s interview) If you don’t get why the market has done so well in the face of overwhelming adversity, this might help:

“Has the pandemic altered the way you think about investing? (Barron’s)

Brown: The thing is how outrageous the response in asset prices has been. There’s an argument to be made that the stock market is higher because of the pandemic than if 2020 had been a more routine year. It’s an affirmation of why we’re rules-based investors.

Ritholtz: Not only did you have to predict that a pandemic would occur, but you would have had to take it to the second level, which is that the Federal Reserve’s going to take rates to zero, and that Congress, which cannot agree on renaming a library, would panic and pass a $3 trillion stimulus. That’s how you get to a positive year, despite all the terrible news. We never try to guess what’s going to happen. If we’re not making forecasts, we’re not marrying forecasts.”

Hmmmmm

So, we now have $3 trillion in stimulus in place, plus zero interest rate for the next two years or more, plus 4 preceding years of near-zero rates, plus an unfunded $2 trillion tax cut (more stimulus) in 2018 and, don’t forget the multiplier effect. These dollars just don’t get spent once. Oh yes, and this has been going on all over the world. WHAT COULD GO WRONG?

As I have repeatedly stated in this blog, “this will end badly.” This secular bull is exactly the same as every other secular bull before it. According to the late Sir John Templeton the life cycle is thus:

“Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.”

I maintain that, even though we have seen significant speculation in certain quarters of the market, most individual investors and many professionals (so-called media experts included) have spent the past 11 years looking in the rear view mirror at their experience with the 2000 tech bubble explosion and the even worse 2008 financial crisis. Individuals have been eschewing stocks in favor of no yield, or low yield, fixed income. The collapse in March/April has reinforced their SKEPTICISM. We appear to be no where near the OPTIMISM stage. We are definitely no where close to EUPHORIA

EUPHORIA will look something like this: In the late 1990s local New York TV stations would camp out in front of Charles Schwab offices interviewing clients about their views of the market. To a man or woman the answers looked something like this: I’m not worried about the market. I’m in it for the long-term. Where else can you get 8, 9, 10% on your money?’ Before this is all over the vast majority of people will love and trust stocks. That is the kind of EUPHORIA Sir John was eluding to.

The Market is always looking ahead

This constant examination of the potential future impact of current events goes on while most investors continue to fret about today’s problems. It is not paying attention to the horror show in progress in our virus-bound healthcare system, nor is it focused on the immediate impact of the surge of Covid19 cases on the economy. It appears to be focused on the apparent impact of successful vaccines (and potential therapeutics) and a huge economic recovery (Worldwide) that we may begin to see in the next six to twelve months … all of this to be supercharged by huge stimulus and low rates world wide.

My Take: The batter has just been made

If you take a longer-term view the good news, whatever it’s going to be, is nowhere near baked in on this market. We haven’t even preheated the oven. The Barron’s article and associated thought process is harmful to sound investment thinking. Of course if you are a big fan of batter, enjoy. My preference is the fully-baked, beautifully iced version of a cake. Obviously, this is a cake you would not want to leave on the table.

What’s your take?

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