Yahoo Finance There are too many bulls, and I'm one of them: trader
The battle between the bulls and the bears was raging long before the Buttonwood Agreement was signed by 24 brokers in 1792, which sought to establish a commission rate to charge clients. Some consider the event the early beginnings of the New York Stock Exchange.
Most investors know the long-term prevailing trend for markets has been higher but that nothing goes up in a straight line. They understand that bulls and bears both play a role in the ebb and flow of markets. Lately, it feels like bears are missing from the conversation. Maybe they’re hibernating or just disgusted with how the game was rigged against them by an organization with deeper pockets—the Federal Reserve.
Don’t get me wrong, I’m not hoping for their return. But paraphrasing Groucho Marx, maybe I’m just a bit uncomfortable being in a club that wants me as a member.
AAII Investor Bullish Sentiment Readings
It’s certainly a good start for the year—with markets (^GSPC, SPY) in the green—but there are some clouds on the horizon that should give investors pause. The post-election rocket higher in risk assets is matched only by the violent move higher in sentiment. AAII investor sentiment readings are the highest in two years, coming off lows before the election.
President-elect Trump
It’s not unusual for sentiment to improve as markets push higher, but it’s important to note that market targets put out by Wall Street are being lifted primarily on potential changes in Washington. Much of that change is going to take time, no matter how fast the president-elect comes out of the gate. A pro-growth agenda can go a long way toward boosting economic output, but tax reform, regulatory relief and an infrastructure spend will need time to get through the legislative process. Given the rhetoric coming from both sides of the aisle, I’m not exactly looking for a “Kumbaya” moment anytime soon. The battle will be long and harsh, leaving casualties along the way.
New tax policies being proposed, like a “destination-based cash flow tax with border adjustment” (DBCFT), could have a dramatic impact on the economy, trade deficit, US jobs, and of course, markets. However, it’s important to remember that the devil is in the details, and we’re going to have to rely on economic models to make final judgments. Most new legislation and programs come with unintended consequences.
In a November post discussing the dark side of repatriation, I talked about some of the titanic forces likely to support the bond market. In a note late last week, Goldman (GS) strategist David Kostin put it a different way, saying, “We expect minimal asset rotation away from debt and into equities for two reasons: (1) Many categories of investors are restricted from allocating assets away from bonds, (2) Investors, such as pension funds and households, that have latitude to shift assets have debt allocations that are currently at the lowest level in 30 years.”
In a vacuum, US Treasuries are an accident waiting to happen, but in a world still pushing the merits of negative rates, they’re hard to ignore. The spread between the US and German 10-year rates is the highest since 1989, helping keep US bonds a desired asset for those who have to own fixed income (TLT).
Supporting the bull thesis, the push for regulatory relief seems real and easy to follow using the S&P 500 financial sector (XLF) as a proxy. But even with a GOP-controlled Congress, nothing is going to come easy.
Also supporting the bulls, 12-month forward estimates for the S&P continue to push higher, and oil, which played the role of leading indicator for the last two years, sits near the highs well above $50. Look, no question there’s a lot to be thankful for, and it’s pretty comfortable here in the bull campsite. Maybe, just a bit too comfortable.
*At the time of this article some funds managed by David Nelson were long SPY.
David Nelson, CFA
Chief Strategist Belpointe
david.nelsn@belpointe.com
W 203-340-1335
C 917-881-3179
