Many long-time clients have mentioned to me recently that it’s been, well, a long time since they’ve heard me sound so bearish on the market. While I completely understand where they’re coming from — and while I know the word has left my lips during some client review meetings — I don’t know that “bearish”, as in committed to the notion that the market has nowhere to go but down from here, completely captures my current thinking.
But, yeah, I am presently leaning in that direction; which leans me toward the minority in my profession: According to a weekly survey performed by premium data provider Investor Intelligence only 17% of advisers are presently bearish on the market (which, by the way [lack of bearishness among advisers], is, ironically, a historically-bearish market signal).
Speaking of “adviser sentiment”, while I spend the majority of my research time mired in data, on some mornings (particularly during earnings season, or if there’s some pending global event [a Brexit vote for example] that I want to keep tabs on) I’ll allow Bloomberg TV to play in the background; this morning it’s muted as Mark Zuckerberg addresses the U.S. Congress. When it’s un-muted, and I catch an interview with a featured guest, I often find myself muttering about how familiar what I assume are the guest’s firm’s talking points sound — and how advisers/analysts, by and large, are your quintessential permabulls.
Here’s the chorus:
“The Fed is now aggressively easing to stimulate the economy.”
“Earnings are coming in better than expected.”
“Credit spreads are signaling very little, if any, recession risk.”
“The yield curve is no longer inverted.”
“Next year’s an election year.”
“Unemployment is at a record low.”
“The consumer is still in very good shape.”
And so on….
Not that the above points aren’t valid, nor worth repeating, but each one can be effectively countered, and, frankly, they absolutely should be countered by the very same advisers who mouth them (good, responsible analysts forever try to blow their own theses out of the water). Otherwise those advisers are simply selling the public, and, alas, their clients, on why they’re afraid to take the risk of being early to leave the longest-lasting stock market party in history. I.e., assuming they’re even doing the work, they absolutely do not want to get defensive now and run the risk that the market runs off (higher) without them (a distinct possibility). I mean, when would they ever get invited back to Bloomberg if they seriously underperform the stock market going forward?
Now let’s you and I counter those above points:
“The Fed is now aggressively easing to stimulate the economy.”
Aggressive easing occurs only amid heightened recession risk…
“Earnings are coming in better than expected.”
Share buybacks (financial engineering) get much (far, and scarily, too much) of the credit for recent earnings per share growth. In fact, buybacks in total have exceeded total free cash flow for U.S. companies over the past two years!!! (see “debt-financed payouts” chart below)
“Credit spreads are signaling very little, if any, recession risk.”
Yield-hungry investors are willing to buy lower-rated bonds, keeping spreads tight, as interest rates rest at historic lows; making for a seriously risky scenario when things ultimately unwind.
“The yield curve is no longer inverted.”
Recessions don’t occur while curves are inverted, they occur after they begin to resteepen!
“Next year’s an election year.”
Ooookaaayyy
“Unemployment is at a record low.”
Well, here’s a 50+-year chart (yellow line is the headline unemployment rate, red-shaded areas highlight recessions, white circles show unemployment bottoming [last one shows the latest reading]) YIKES!!:
“The consumer is still in very good shape.”
Well, here’s another chart: This one shows the ISM Manufacturing Survey (white line) along with the Conference Board’s Consumer Confidence Survey (in yellow). Note how the ISM survey led the consumer prior to the past three recessions, and look at how they stack up currently (again, YIKES!!):
So, while, again, those are all points worth making (and countering!), when we step back and objectively view our surroundings we — more so than at anytime over the past 10+ years — are finding gaping holes in the prevailing bullish narrative!
Back to the top: You might think that what I just presented indeed suggests that I believe that the market has “nowhere to go but down from here”, but not necessarily: In fact, it’s still my base case that the surface things that concern me — that could precipitate the next recession sooner than otherwise would’ve been the case — are by and large the result of a most untimely implementation of protectionist policies the world over (although predominantly in the U.S.). Therefore, should, as political risk should dictate, said policies be completely abandoned, there remains a chance (albeit slimmer by the day) that a near-term recession can be averted; in which case the concerning trends would resolve higher and we’d be reengaging in a manner that allows us to responsibly capture whatever upside the market has to offer. But, frankly, and alas, that’s just not our present state of affairs, and, therefore, presently trying to capture whatever upside the market has to offer would, in our view, be patently irresponsible.
Have a great weekend!
Marty
P.s. Here are some additions to the “Charts That Trouble Me” file I recently introduced: click any insert to enlarge…
Central banks’ stimulus has boosted stocks, but has done little for the economy
Wealth inequality highest since 1929 (breads populism)
Corporate cash payouts exceed earnings
Corporate debt to GDP at all time high
Bonds lead, stocks follow
No recovery in sight for China
Freight shipments spell recession
Consumer confidence to unemployment ratio near all time high
Global capex weakening
Debt-financed payouts
Negative-yield government bonds
Money fund inflows rival Great Recession levels
Leveraged loan ratings suspect
BBB-BB spread
Investment-grade bond interest coverage & cash-to-debt waning markedly
