On the cusp, always on the cusp. It seems this is the way for the market these days. Frankly, it is a bit tiring – will the market rollover or will it begin a long leg up? Speculation abounds and one has to constantly analyze the analysts, consider and reconsider the data, decipher the historical patterns, and then come down on the side of either the Bulls or the Bears. My chosen side is and has been for some time the Bulls. The best arguments are for a pullback and then a long leg up.
- We are reaching a turning point where robust capital markets finally inject optimism into corporate decision making. Recent activity in M&A is reflective of this. And it suggests that we are on the cusp of a new cycle in private capital spending. All of this points to an improvement in labor markets, better growth in personal income, and a sustained improvement in final demand.
Of course, the above is only reasoned opinion, but consider this – as tiring as this constant uncertainty is and has been for market players, it must be as tiring for businesses. Imagine businesses in the last three years trying to gauge their business activity for the coming year given the political and economic uncertainty of the last three years.
Consider the reasoned opinion below as well when trying to decide which side of the overall argument you believe.
- While it is true that growth has been disappointing, the headwinds that have restrained GDP are abating. The big macro uncertainties of Europe and China have receded dramatically. At the same time, with each passing month we get closer to greater clarity on how the fiscal cliff standoff will play out. Even a bad deal will at least remove the scary nature of a big unknown. The diminishing risk of fat tails will allow the cumulative impact of negative real interest rates to gain traction.
What do the Bears have to offer – overall bullish sentiment is so high that the market will fall from the sheer weight of over accumulation?
- Investor’s Intelligence reports that Bullish Sentiment decreased on the week to 48.4% from 52.6% (54.7% two weeks ago).
Or that the rush of retail investors into the market in January is the surest contrarian sign of impending collapse, as the retail investor only comes to the party en masse just as the drinks and food are running out?
- It is still “very early” in the shift away from fear, but, with individual investor’s allocation to stocks at 30-year lows, and stocks having been liquidated in favor of bonds for the last five years, there could be a long runway for money to return to stocks and drive prices higher.
Perhaps you find appealing the bearish argument that the European economy is so broken it is just a matter of time before its dead weight derails the fragile global economic recovery.
- The Eurozone ZEW Economic Sentiment index rose to a reading of +42.4 in February, which was above the expectations for +35.5 and an improvement over January’s reading of +31.2 (Dec: +7.6, Nov: -2.6).
One should never underestimate the power of confidence in the economic and market worlds. Speaking of confidence, the Bears have shown little confidence in the Fed, as they have been arguing for some three years now that Chairman Bernanke is leading the US economy toward disaster. Consider the reasoning below as you ponder the Bears’ argument in this regard.
- While some dismiss Fed policy as creating the next bubble in credit markets, this is a misuse of the word bubble. A bubble describes an excess that eventually self-destructs. This, in contrast, is a healthy tonic for a very fragile economy. It is the only pathway out of a long-lasting liquidity trap. Just ask the Japanese about whether liquidity traps cure themselves. They don’t. It takes a policy shock. This is exactly what the Fed is delivering. The precondition for a better economy is a powerful and long-lasting rally in stocks and credit, thus driving down the cost of capital for American business.
It is hard to argue that the cost of capital for American businesses, as well as the American consumer, as well as capital for both across the pond, is not low. This, of course, brings me back to the opening – We are reaching a turning point where robust capital markets finally inject optimism into corporate decision making.
For some years now, money has been flowing into the market based on strong corporate earnings and the steadfast continuity of the Fed stimulus. Belief and confidence in the American economic system have triumphed over slow growth, fear of hyperinflation, political chaos, and the incessant negativity of the breathless media. In this context, the market has found its way back to where it fell away in 2007. Finally, the market has re-established its baseline.
The difference between 2007 and today, however, is today the economy is growing, whereas back then, it was slowing down quickly. Additionally, in 2007, a collapse in housing, a meltdown of the financial sector, and a liquidity/credit crunch of historic proportions yanked money from the market and caused businesses to cinch up and to start hoarding cash. In short, the money flow stopped.
Looking at the current economic and market context in this light makes the bullish reasoned opinion that opened this column today more plausible than the bearish arguments suggesting either/or economic or market collapse, or did I miss something?
Trade in the day; Invest in your life …
