One of the most fascinating things about the stock markets is that there are as many views and opinions about the markets as the number of participants. Currently most of the market participants though scared are bullish, as Central Banks have continued to infuse liquidity relentlessly to keep the asset prices up. The “Bernanke Put” has been a huge factor in the bullishness and the risk on sentiment in the US markets at least. Despite global economic weakness being reported each day, the stock markets have continued to melt up. Massive risks to the global economy persist such as:
1) Massive trade and monetary imbalances
2) Huge Debt
3) Demographic problems in developed countries
4) Geopolitical risks particularly in oil rich countries
5) The European malaise
However the Central Banks with their ZIRP policies and governments with massive fiscal stimulus have somehow managed to keep the markets, assets and economics afloat. Here are two views on the market both of which make logical and coherent arguments though both are contradictory.
Bear View from Todd Harrison
I will say it again—I never wanted to be that guy. I’ve traded two-sided this year. While my performance is roughly 10% off the 2012 high-water mark, I’ve been rewarded with that approach. I do not enjoy being the pessimist realist, particularly when there are so many reasons to climb aboard the bovine bandwagon: QE3 is all but a given, European leaders are vowing to do “whatever it takes,” and there is percolating performance anxiety into quarter- and year-end.
These are all very real upside catalysts; they’re also very well known at this point.
Last night, after my wife Jamie, the kids, and the twins’ father, Paul, enjoyed dinner—yes, we roll that way as it makes the children happy— I picked up The Wall Street Journal, flipped through the pages, and tossed it back on the kitchen counter.
Before I realized it, I mumbled out loud, “Man, we are going to crash and when we do, it’s gonna make 2008 look like a pimple on an elephant’s ass.” When Paul asked me when, I smiled and said, “If I knew that, brother, I would be a very wealthy man—but my best guess is by next year.”
We all know the story about the boy who cried wolf, and I make it a point not to cry and to avoid wolves. A few weeks ago, my intuition got the better of me and I posed the question, Is the Stock Market Setting Up for a Crash? Knowing thyself, I should have sat on that column for a month or so as I’m typically early and yes, often wrong. Still, I can’t shake the sense that something wicked this way brews; what I am unclear on is the timing, and as we know, timing is everything.
Bull View from Richard Bernstein
“Investors have the impression that bull markets are days of wine and roses. However, nothing could be farther from the truth. Bull markets are periods of fear. This becomes quite obvious when one examines the valuation and sentiment data associated with the 1982, 1990, 1995, and 2003 bull markets.
The current bull market, which began in March 2009, seems to be fitting the historical precedent. The S&P 500 has appreciated nearly 100%, yet most observers are hesitant to concede that the US stock market is in a bull phase. Individual investors are still searching for protection, and ignoring the fact that equities have appreciated significantly more than the fixed-income yields for which they search. Institutional investors are still looking for “absolute returns” and paying high fees to alternatives managers instead of simply buying old-fashioned stocks.
This pervasive hesitancy to invest in US equities despite the asset class’s significant performance further cements our bullishness regarding the asset class. Bull markets typically end with over-enthusiasm, and not the fear that is so prevalent today.”
It is hard to make the argument that equities are overvalued when the 10-year t-note is approximately 1.50%. After all, if one didn’t like equities when the 10-year was at 3%, then one would have to be roughly twice as bearish to not like equities with a 10-year at 1.5%.
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