Dave Moenning had the honor of being invited to present at this past weekend's Trader's Forum in Chicago, Illinois, put on by Trader's Library. This type of event is a great opportunity to interact with both students and fellow investment professionals on the outlook for the stock market as well as investing/trading strategies.
While the strategies people discussed were many and varied, when the discussions inevitably turned to the outlook for the stock market, the same song was heard over and over again. In short, despite the stock market enjoying one of the best years in a long time and having put up big numbers since March 2009, most folks expect the current bull market to end badly - and soon.
Fighting the Last War
Several of the investment pros that attended over the weekend are very successful. However, unless they had very gray hair, most still expect the stock market to remain in the boom/bust pattern that has been seen since 2000. Think about it; unless you have been investing for more than fifteen years, you only know a market that crashes in horrific fashion, recovers for a few years and then crashes again. As such, most of the people in the room are bracing/preparing for the next bear market.
In Wall Street parlance, this is referred to as "fighting the last war." In other words, the majority of investors are now very prepared for the next 30 percent drop in the S&P 500. And because of this, it's easy to want to declare that we won't see another big, bad bear market for quite some time.
Lest we forget, the stock market has only experienced three brutal bear markets in the last 25 years. There was the crash of 1987, the tech bubble bursting in 2000-02 and the credit crisis debacle of 2008. But since two of those declines came in a nine-year period, everybody expects the uber-bears to continue to show up.
Big, Bad Bears Require a Reason
Although everyone in the room agreed that the algos can push the stock market around at any point in time, oftentimes for little or no reason, folks needed to be reminded that the really nasty declines in the market are usually accompanied with a darn good reason. Put another way, the S&P 500 doesn't dive 40 percent just for the heck of it. No, there is generally an issue behind the really big moves - in both directions.
The State of the Markets" presentation pointed out the secular periods since WWII and tried to make the point that a secular move in either direction doesn't last forever. There was a secular bear market from 1966(ish) to 1982, a secular bull from 1982 through 2000, and then the secular bear that began in 2000. The key point was that the current boom/bust secular bear cycle may be changing.
To be sure, we won't be able to know whether this is true or not for years to come. But the younger compatriots (who have never been exposed to a secular bull environment) were told that if a secular bull has begun, the game is about to get very fun. This pronouncement brought smiles as well as a fair amount of skepticism. An explanation was required that in a secular bull period, the "cyclical" or "mini" bear markets are short and sweet.
Sure, the market gets tagged for losses of 20 percent or more on occasion. However, the losses tend to be recovered in relatively short order. As such, a "buy the dip" strategy was suggested as what would become a key big-picture approach.
The Constant Interruptions
In order to justify long-term optimism, it was suggested that if the U.S. economy hadn't been interrupted by the European debt mess during the summers of 2010, 2011, and 2012, we would likely be seeing stronger economic growth by now. It was opined that it was the severe correction of 16 percent in 2010 on the back of the first Greece crisis that caused consumers to crawl back into their caves.
It was also suggested that what is called the "mini bear" of 2011 (where the S&P 500 dove 19 percent in very brief time), which was caused by the dynamic duo of Europe and the U.S. debt downgrade, also caused the economy to stop on a dime.
Each crisis caused the stock market to tank very quickly. This kept the fear created from 2008 to remain fresh in the minds of consumers. As a result, confidence remained weak. And when confidence is low, companies don't hire, consumers don't spend and the nation's GDP slows to a crawl. However, it was contended that if the European debt crisis had not caused the market meltdowns and the GDP slowdowns, our economy would probably be humming along by now.
If It Walks Like a Duck and Quacks Like a Duck...
The bottom line is that the economy is moving forward at the present time. In addition, a great many economist expect the pace of the recovery to improve in the coming quarters. And if this turns out to be the case, then earnings will likely perk up as well, which, in turn, well...you get the idea.
One bear argument is that the economic recovery is already getting old and thus, is susceptible to another recession. However, it is important to recognize that economic recoveries don't die of old age. No, they typically die from a tightening of monetary policy and/or financial or economic shock. In fact, the last three economic recoveries lasted 7.7, 10.0, and 6.1 years respectively. So, the fact that the current recovery is now entering its fifth year isn't necessarily a bearish omen.
Other reasons to be hopeful that a secular bull has begun include the following:
- Monetary policy will remain accommodative for the foreseeable future (remember the Fed has said it has no plans to sell many of the securities on their balance sheet)
- The economic expansion will likely be longer than normal (Ned Davis Research Group projects the current expansion will run through 2017)
- The credit cycle has turned positive
- The housing market has turned
- The automobile buying cycle has turned
- U.S. Manufacturing is improving
- The demographic trend is turning positive for a decade or so
- Europe's recession is not as severe as had been feared
- No hard landing in China
- Japan's QE-Infinity
- The dollar's decline may be ending
These topics may be expanded upon in coming missives. However, the bottom line is if the market continues to make new highs and those highs are confirmed by global markets, then we may have to be willing to recognize that a new secular bull market is upon us. One can hope, right?
Click Here For More of Dave M's "Daily State of the Markets" Commentary
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 both identify and 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).