With the markets technically reaching an “all-time high” in yesterday’s inter-day trading, we are frequently asked whether it is time to get out of the markets. For that reason, we have been gathering our thoughts on what this bull market has accomplished, what it has overcome over this 10-year run and what fundamentals are still driving this market.
Obstacles Overcome by the Bull!
Skepticism – Bulls have always been the underdog throughout this entire recovery – and this actually is what drives the markets higher. If everyone was on the same side of the boat, that is when you should be nervous. We never reached those euphoric levels of buying. When there are no more bears, there is no more new money. Please, bring on the skepticism.
Valuations Too High – Some have argued that valuations were too high. That may have been the case twelve months ago, but even then, one could argue that with rates so low and uncompetitive for investor dollars that equities deserved to be priced at a premium. But as of now, after the tax cuts/fiscal stimulus, we have seen a ramp up in revenue and earnings for companies that have resulted in PE levels that are much more reasonable now. Investors need to recognize this. All time high stock prices do not mean overvaluation if corporate earnings are rising in tandem. Moreover, stocks are still cheap compared to bonds.
Political Turmoil – Throughout this recovery, we have faced tons of geopolitical threats and, time after time, we have seen that politics only affects the markets in the short-term. The market has shrugged off political gridlock, government shutdowns, uncertain 2016 elections, the rise of the Tea Party, Russian interference, and North Korea's Rocket Man. We will see how the markets deal with this latest Cohen debacle. Even these trade issue talks right now seem manageable considering the markets have been able to grind higher over the summer to recover the losses from the February correction.
Rising Rates – for the last three years, pundits were telling investors to fear the Fed and not to trust the market when the government starts tightening. That said, if you had been on the sidelines, you would have missed out on a great market run up. Overall, the Fed is raising rates towards “normalization” and not trying to combat an overheated economy or inflation. That’s why investors are not fighting the Fed when they decide to stay in the market.
Debt Ceilings – For a period, investors felt the US had too many bills to pay and the S&P actually downgraded US treasuries. This scared a lot of people out of stocks, but that has just represented a good buying opportunity.
Mini Bear Markets – since the beginning of the recovery we have always had bear markets and corrections. That’s a healthy sign of a market. Sometimes it is a sector led correction – sectors such as Retail, Energy, Housing, and Semi-Conductors. When mini bear markets hit these sectors, what you see is investors rotating into different sectors – not necessarily permanently removing their capital away from the markets. After some time has passed and these once hated sectors have bottomed and their comparables become attractive, you get raging bull markets in these once hated sectors (look at retail stocks right now rising with same store sales stats improving to mid-to-high single digits!)
Europe Woes – Remember when Greece was going to default? Now it’s solvent. Then it was Portugal, Italy, Ireland and Spain. Now we are worried about Turkey. Each time we see that these exogenous events don’t carry over to North America in a crippling way. Instead, these short term downturns have proved to be good buying opportunities.
China Worries – Remember when fears of a weakening PRC led to a Chinese stock market collapse, which resulted in the Aug 2015 flash crash in the US? We have since bounced back from that, but now with China dominating, people don’t like that either. Investors are negative when China is soft and negative when China is strong. You can’t have it both ways, people! Now that they are strong again, Trump’s trade dispute with China is grabbing all the headlines. Most people think that President Xi has the advantage, because he doesn’t have to worry about getting reelected, but let’s be realistic and understand that a healthy economy and rising standards of living are vital for avoiding social unrest – which is a primary objective of China. All considered – for months we have been talking about tariffs and retaliation, and the market has grinded higher by giving the tariff war the benefit of the doubt that the leaders do eventually want to shake hands and negotiate and that the US has the upper-hand to get at least some reduction in the deficit.
Inverted Yield Curve – people are scared of the idea of an inverted yield curve, which normally signals a recession. Although we are not there yet, people are fearful that the US 10-year bond has been held up at low levels (driven by market demand), while the US Fed is raising short term rates and this could cause an inversion. The US 10-year bond is probably artificially low considering so many global investors are buying it up, attracted to the US’s higher yield and strong currency. That said, we have been living with this for years and it hasn’t proven to be a problem.
FAANG / Tech Wreck – We have seen FAANG rise and fall due to political issues, PR issues, scandals, and lower guidance. How quick people were to say that “Tech is dead” and that the market needs a new leader. That was just a month ago! That said, their stock prices have recovered each time and they continue to be tech giants that have proven to be able to pivot and reinvent themselves. Facebook has gone to Instagram, Amazon has Amazon Advertising and AWS, Apple has developed a subscription revenue stream, Netflix has gone international, and Google has gone AI/Autonomous Driving. This will continue to be a secular growth story and nice to see that market is quick to shrug off the bears.
Overall - What’s Driving the Markets into the future
- Stable inflation/ neutral Fed
- No credit stress
- Ramping investment
- Strong EPS
- No recession: strong consumer
- Stock buybacks
Conclusion: Until we start seeing the fundamentals shift for the worse, I advocate staying in the market, continuing to rebalance portfolios, and not panicking and selling just because investors think we are “due for a pull-back”. Even with a pull-back, considering the announced record stock buybacks, investors should feel comfortable knowing that the businesses themselves are providing a level of buying support for the market, and at the minimum are willing to temporarily ride the market lower with while focusing on the bigger picture.