It Can't Continue, Can It?
Yesterday, we talked about the fact that the stock market has now enjoyed the longest stretch ever without experiencing a correction of 3% or more. We noted that the CBOE Volatility Index (aka the VIX) recently hit an all-time low and that volatility in general is the lowest in decades. It is also worth noting that the S&P 500 index is up nearly 15% on the year and that the venerable blue-chip index isn't even the best performing index so far in 2017.
And yet, nearly every single financial advisor I talk to is worried about the stock market. They are worried about valuations, investor sentiment, a replay of 1987, what the Fed is going to do next, the state of tax reform, a meltdown in ETF-land, etc. In short, advisors fret that another bear market will turn their clients' 401K's into 201K's again and appear to collectively be singing the refrain from The Who's big hit, "Won't get fooled again."
To these folks, it is almost inconceivable that stocks could move higher from here. And yet, the DJIA closed at yet another all-time high yesterday. So what gives?
The answer, in my opinion, is that we've seen this movie before - several times. Stocks climb a wall of worry and continue to march higher for longer than almost anyone can imagine. Yep, that's how bull markets tend to work.
In my experience, bull markets don't end when everyone on the planet is expecting a bear to begin at any moment. The market doesn't suddenly decline 30% or so just because valuations are high. No, as I've opined a time or two recently, bear markets tend to be "caused" by something. And right now, with the market on solid footing, there doesn't appear to be a bearish catalyst on the horizon.
On the contrary, it's actually the bulls who have the wind at their backs right now. And while I do worry that the following laundry list of positives for the bull camp might be a little too popular right now (meaning that a garden-variety pullback of 3% - 5% could occur at any time, for almost any reason) the bulls do seem to have a lot going for them these days.
Below is a sampling of some of the positives that would seem to suggest the bulls may be able to just keep on keepin' on down the road...
Earnings: One of the simplest bullish arguments is that if earnings are at record highs, then stock prices should follow suit. So, with another decent reporting season underway...
The Economy: The bottom line here is that global economic growth has been surprising to the upside this year. As a result, stock prices continue to "adjusted" to reflect the state of economic growth. This isn't rocket science.
Inflation: The lack of inflation is a mystery to many - including the current Fed Chair, Janet Yellen. However, given that too much inflation has tended to be a bad thing for stocks historically, the current state of inflation - or lack thereof - continues to support our heroes in horns.
QE: While the US has embarked on QT (quantitative tightening), both the ECB and the BOJ are continuing to print money on a monthly basis. And since money tends to go where it is treated best, fresh capital may continue to find its way to the U.S. markets.
Seasonality: Don't look now fans, but the seasonal headwinds that have been blowing since August are about to turn into tailwinds as the November - April period tends to be the best time of year to be invested in the stock market.
Passive Flows: Remember, managers of passive mutual funds and ETFs don't really do much selling when money is flowing in. And with investors continuing to pump money into the passive arena each month, well...
Performance Anxiety: Fund managers that have kept some powder dry or played the game conservatively in 2017 are likely behind their bogeys at this point. And with performance bonuses on the line, this is the time of year when capitulation can come into play.
Performance Chasing: This is a close cousin to the performance anxiety issue as investors of all shapes and sizes like to chase the leaders into year-end.
BTFD: Another potential reason that volatility has been so low this year is that everyone on the planet is now a dip buyer. And given that cash on the sidelines may need to get invested, any/all dips continue to be met with buying.
The Tax Trade: What list of bullish tailwinds would be complete without a discussion of the Trump Trade, right? Or in this case, the expectations for some form of tax reform. The argument is simple - lower taxes mean higher earnings. 'Nuf said.
To be sure, this is not an exhaustive list of the bull camp arguments. However, running through this list does give you a reason or two to at least consider the idea that stocks could continue to be bought in the coming months.
Sure, a correction could begin at any time. And gun to the head, I'd argue that any headline suggesting that tax reform could be delayed or derailed might be the trigger our furry friends are looking for. But so far at least, it looks to be more of the same. Party on Wayne!
Thought For The Day:
By swallowing evil words unsaid, no one has ever harmed his stomach. -Winston Churchill
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of Tax Reform
2. The State of the Earnings Season
3. The State of Fed Policy/Leadership
4. The State of the Economy
Wishing you green screens and all the best for a great day,
David D. Moenning
Chief Investment Officer
Sowell Management Services
Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.
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