ACTV - Bear Market Rally Or Next Leg In Secular Bull?
Summary
- The market won’t bottom until we are in the depths of a recession - wrong!
- Recent market action on the upside has brought the "boo birds" out in force.
- Good news... bring it on! Sentiment continues to stink.
- Forget "hard landing" or "soft landing," "touch and go" may be closest description (if we land at all), and as usual, the market is way ahead of the crowd on this.
Market's bottom before the fact
Speaking of facts, here is a fun fact for those of you worried about the notion from the Fed of "higher, longer": Average fed funds rate between 1971 and 2023 was 5.42% .
Markets are forward-looking. They sense risk and price it in before the fact. This is something many experts seem not to have a clue about. In the case of the most recent market rout, it became apparent that the inflation we were experiencing was not going to be so transient. Talk of runaway inflation and a Fed willing to pull out all the stoppers to get it under control made high-multiple Nasdaq the first casualty, dropping from an all-time high of 16,212.23 to a low in October 2021 of 10,088.83 (-38%). Again, Nasdaq was most severely affected because of its many high-multiple, large-capitalization components and their great sensitivity to the gravitational pull of higher interest rates on their P/E multiples. The S&P succumbed in early January 2022. The Dow Jones Industrial average was the last to give up the ghost in October 2022. Why? It did not have the high-P/E risk of the other two indices.
It now appears that we have survived significant increases in rates (.50% to 4.75% in Fed Funds) with no appreciable damage to the economy, as evidenced by the January jobs report (517,000 new jobs vs. 187,000 estimate and 3.4% unemployment rate). Also, we have CPI inflation for the last half of 2022 trending below 3%. The medicine seems to be working and, unlike the many dire forecasts from the pundits and media, it is not killing the patient. It looks like this current reality started being priced into the markets in October 2022.
Best of luck if you're waiting for hard times to be involved in this market.
Nonetheless, the boo birds are out in force
"The market is extraordinarily overbought," Lisa Shalett , Morgan Stanley Chief Investment Officer, Wealth Management, said in a phone interview with CNBC (subscriber-only access). "We know we broke through some positive technicals. We think a lot of that is being driven by liquidity. But we think folks buying in here are buying into yet another bear market rally. This feels so much like January 2000, where everyone said the worst is behind us and it was only the beginning."
Advice for Lisa from John Maynard Keynes: "Markets can remain irrational (overbought or oversold) longer than you can remain solvent"
I will agree on one point with the quote above. I was active in the business and an investor in 2000. January 2000 was a great time to be selling tech stocks... the peak of the tech bubble. It was not a good time to be selling many other stocks ignored during the tech bubble. Lots of money was made in the also-rans between March 2000 and September 2001.
On March 10, 2000, the Nasdaq Composite hit a then all-time-high of 5132.52. The closing subsequent low after the World Trade Center attack 9/11/2000 came in October 2002 at 1108.49. I don't see this time being as severe. By the same token, I do see the somewhat dubious rallies in Meta ( META ) (beating highly reduced expectations and better profits on the heels of big personnel cuts/cost cutting) and Tesla ( TSLA ) (better-than-anticipated sales and earnings) to be the beginning of something big in tech land.
Michael Burry ("The Big Short"), famous for his research and money making prowess through his work uncovering the disaster that befell us in 2008, the sub-prime mortgage fiasco, said "SELL" again via a tweet Tuesday evening (pre Fed statement) to his 1.3 million followers. He made his great call in 2008 on specific research that uncovered a huge systemic disaster just waiting for the triggering event, the Fed raising rates, draining the money to see, as Warren Buffett puts it, "who's swimming naked." This was truly a great call because most investors, including financial stock research specialists, did not see it coming. I am not certain what the systemic issue is this time, or the trigger, but the Fed has been draining the pool for almost a year now, and the only major casualties seem to be the high- or infinite-multiple tech and innovation group. Also, Burry with his incredible background is not alone or contrarian here. He is part of a very large choir singing the same tune.
Good news... bring it on! Sentiment continues to stink
Despite the continued job growth (jobs returning to the USA, globalization beginning to flame out), a 63-year low unemployment rate, wage growth and a strong market, you get the impression nobody believes it. Don't confuse me with the facts. My favorite news sources on these matters are telling me a different story, and they cater to my prurient interest - bad news (and bad news sells). Despite a year of good earnings and economic statistics the American Association of Individual Investors' (AAII) bullish sentiment reading has remained below its historical average for the 57th consecutive week (2/1/2023 reading 29.9%, historical average 37.7%).
For the past 13 years, we have not been able to get by the "skepticism" stage of John Templeton's four-phase bull market definition. You remember... "born on pessimism, grow on skepticism, mature on optimism and die in euphoria." Since the being of this secular bull market (March 6, 2009, S&P 500 -666), there has been constant doubt waiting for a shoe to drop that never seems to happen (pessimism). I can show you Kort Sessions posts written over the past ten years covering periods of great stock market growth, but the optimism never came. There was euphoria at the top in 2000. There were man-on the-street interviews featuring investors with no fear saying, "I'm it it for the long run... where else can I get 9 or 10 percent on my money?" We have not seen that in this market, nor have we seen any prolonged periods of optimism. What Templeton is really talking about here is human nature, which, as long as I have observed, doesn't change. If Sir John's definition on bull market tops is correct, the best is yet to come!
Forget "hard landing" or "soft landing," "touch and go" may be closest description (if we land at all) and, as usual, the market is way ahead of the crowd on this. My vote is that this is not a head fake but the next leg in a secular bull market!
What's your vote?
For further details see:
Bear Market Rally Or Next Leg In Secular Bull?