No Time To Chase Old Bulls
Lance Armstrong confessed to Oprah Winfrey last week what most rational observers had concluded many years ago – he took performance enhancing drugs during his 7 Tour de France wins. His excuse – as Randall Forsyth points out in Barron’s this week – is one that every parent knows well – everyone else was doing it. Peer pressure pushed Lance Armstrong to break the rules, win a bunch of bike races, convince the US Postal Service to pick up the expenses, start a charity that somehow manged to be more about him than its beneficiaries and oh yeah, by the way, become filthy rich in the process. Now that his lies have come to light and he’s facing the prospect of actually having to work for a living, he’s suddenly become contrite. Excuse me, I’m going to have to take a break here to recover from the emotional trauma of watching Lance’s life fall apart before my very eyes. Okay, I’m over it now.
Peer pressure can be powerful stuff and if my teenage years are any indication can easily lead to bad hairdos, a predilection for parachute pants and other unfortunate fashion trends, a talent for drinking games and a serial case of the munchies. Fortunately for my family, those things can be changed pretty easily and the lasting effects are minimal. As we’ve seen over the last 15 years, peer pressure can exert a powerful influence over investors too and the consequences are more severe. The internet and housing bubbles created easy wealth for the cool kids who jumped on the trend early and got out ahead of the crash. Unfortunately, the hoi polloi got in late and stayed too long. How many of you out there still have some remnant of the dot com crash, a kind of financial version of a Members Only jacket, residing in your brokerage account?
I bring this up now because while there are no obvious bubbles – bonds might be an exception but we don’t know that yet – the pressure on investors is enormous right now. The yield on safe assets is low to non-existent so the portion of your portfolio that should be dedicated to capital preservation and peace of mind has turned into a capital destroying source of anxiety. The Fed’s policies have turned CDs and money markets into the financial equivalent of sporting a pocket protector when the cool kids don’t even have pockets. The in crowd swapped their CDs for dividend stocks, corporate bonds, junk bonds, emerging market bonds and anything else with a yield over the last few years and it is hard not to imagine them sniggering among themselves at the dweebs still sitting in cash, determined to avoid a repeat of 2008. If you have played it safe since 2008 and you’re getting tired of hearing your idiot brother in law tell you about the fabulous returns he’s making in local currency emerging market bonds, the E-Trade baby is haunting your dreams and you’re about to wire a big chunk of your savings to your broker, my advice is to back away from the mouse, pull out an old brokerage statement and take a look at that 23 shares of Alcatel Lucent you keep hoping will go back up. Take your Members Only jacket out of the closet. Ugly isn’t it?
This isn’t a market call per se or a statement about the economy. It is a statement about investor sentiment and how it has changed in just a few short weeks. Immediately after the election it was almost impossible to find anyone who thought the stock market could go up in the face of the fiscal cliff, higher taxes, debt ceilings and a whole host of potential problems (except for this nut). Now, just a few short weeks and a tax hike later we’re actually seeing money flow into equity mutual funds at rates that rival the all time weekly records (set in late 2007 I might add). Now, as the President and his allies declare that our problems are nothing a few more taxes can’t solve, every sentiment poll shows a majority of investors bullish. Now, after years of steady equity fund withdrawals as the S&P 500 more than doubled off the 2009 lows, now – now???? – individual investors have decided its finally safe to jump back in the risk pool.
Buying stocks or any other risk asset at this juncture just feels like succumbing to the peer pressure of the market. Stocks and other risk assets keep going up, mocking those of us who aren’t fully invested, who lacked the temerity to fully commit to a market we don’t trust. Yes, I know the Fed has our back with QE eternity but haven’t they always? The Fed didn’t prevent a NASDAQ crash in 2000 or a banking crisis in 2008. I know, the economic data is pretty darn good and I still think the longer term outlook is pretty good too but we’re still looking at December data right now and the payroll tax hike didn’t happen until the beginning of the year. Have you heard people bitching about their paychecks? What happens in February when we start looking at January data?
I believe the US and global economy will probably avoid a recession this year but it is far from a slam dunk. The payroll tax hike is going to hurt incomes and spending at least in the first quarter but I have no idea the magnitude of the hit. Housing is still recovering as evidenced by the outstanding starts numbers last week. Will it continue? I think so but as I’ve said many times over the years, household formation is the critical variable and that is dependent on job growth which remains rather punk. Europe appears to have stabilized but there will be critical elections this year that could change things overnight. China also appears to have stabilized but credit growth throughout Asia is unsustainable (mark my words; the next crisis comes out of Asia) and growth there is still dependent on exports primarily to a US still searching for growth beyond the new normal. Japan is embarking on another round of monetary and fiscal stimulus and that has raised expectations there but frankly no one knows whether the program will work. Based on past experience, a smart bettor would probably have to opt for the under on Japanese growth. And lastly of course, don’t forget that the politicians here in the US will be arguing for another few months about tax and spending policy which is rarely good for investor confidence.
Combine all that uncertainty with a surfeit of bullishness among individual investors as well as advisers and I think you have a recipe for a correction. Whether it is just a correction or the beginning of the next down leg in the great secular bear market is something we won’t know until we see how and why it develops. If the market sells off and the economic data gets worse while investors stay bullish that would be a signal that something more is afoot. For now though the key is to plug your ears and ignore the siren song of rising markets. It is not a time to be chasing old bulls.