Written by Lance Roberts, Clarity Financial
In April of 2019, I wrote an article discussing the 10-reasons the bull market had ended.
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“The backdrop of the market currently is vastly different than it was during the ‘taper tantrum’ in 2015-2016, or during the corrections following the end of QE1 and QE2. In those previous cases, the Federal Reserve was directly injecting liquidity and managing expectations of long-term accommodative support. Valuations had been through a fairly significant reversion, and expectations had been extinguished. None of that support exists currently.”
It mostly fell on “deaf ears” as the market rallied back to highs. Since then, the market has continued to “cling” to a “wall of worries” as noted in Tuesday’s missive by Doug Kass:
- The Fed Is Pushing On A String:
- Untenable Debt Loads In The Private And Public Sectors.
- An Unresolved Trade War With China.
- The Global Manufacturing Recession Is Seeping Into The Services Sector.
- The Market Structure Is Frightening.
- We Are At An All-Time Low In Global Cooperation And Coordination.
- We Are Already In An “Earnings Recession.”
- Front Runner Status of Senator Warren (Market Unfriendly)
- Valuations On Traditional Metrics (e.g., stock capitalizations to GDP) Are Sky High.
- Few Expect That The Market Can Undergo A Meaningful Drawdown.
- The Private Equity Market (For Unicorns) Crashes And Burns.
- WeWork’s Problems Are Contagious
The reason I said “cling,” rather than “climb,” a “Wall of Worries” is that over the last 22-months the market really has not made much progress. With the market only marginally higher than it was in January of 2018, it has been mostly the ability for investors to withstand a heightened level of volatility.
The following is a WEEKLY chart of the S&P 500 as compared to its 4-year (200-week) moving average.
Here is the same chart on a MONTHLY basis as compared to its 5-year moving average.
Note the extremely long time frames of the underlying moving averages. We will revisit these in a moment.
For investors, it is important to understand the “bulls” maintain control of the market narrative for the moment, and, as noted last week, the “bullish wish list” was fulfilled over the last several weeks. To wit:
- The ECB announced more QE and reduced capital constraints on foreign banks.
- The Fed also reduced capital requirements on banks; and,
- Initiated QE of $60 billion in monthly treasury purchases. (But it’s not QE)
- The Fed is cutting rates as concerns over economic growth remain.
- A “Brexit Deal” has been reached. (Just don’t read the subtext that says it likely won’t pass Parliament.)
- Trump, as expected, caved into China and sets up an exit from the “trade deal” nightmare he got himself into.
- Economic data is improving on a comparative basis in the short-term.
- Stock buybacks are running on pace to be another record year. (As noted previously, stock buybacks have accounted for almost 100% of all net purchases over the last couple of years. See chart below.)
If you are a bull, what is there not to love?
This is a critical point. Given the fact we are now moving into the “seasonally strong” period of the year, the “bulls” clearly have the advantage, for now.
This is why we continue to maintain a long-equity bias in our portfolios currently. We also recently slightly reduced our hedges, along with some of our more defensive positioning. We are still maintaining slightly higher than normal levels of cash.
Note: If you want to track our portfolios “real time,” receive buy/sell alerts on holdings, and have access to all of our data and analysis tools, check out RIAPro.net today for a 30-day FREE Trial.
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