(article written by Sander Read of Lyons Wealth Management)
The stock market has just broken to new highs in the face of considerable investor skepticism, even disbelief. For a year and half, the market exhibited lower highs and lower lows, and three corrections of more than 10 percent. Then Brexit came along, shocking market participants and producing a sharp swoon--one that almost immediately dissipated. And now the market is actually breaking through to all-time highs!
How could this be happening with all the issues, from ongoing Chinese weakness to the considerable shock of Brexit, that ought to bedevil the market, at least from the bears' point of view?
Brexit should serve as a useful reminder to investors of an important fact that can easily be forgotten in the day-to-day market slog: dramatic changes to the status quo can and do happen. You simply can't count on political stability or voting outcomes until people actually get into voting booths. In no way should the markets' quick recovery be taken for granted.
A sudden shock may hit the system at any time. But as value investors, we believe that as far as the U.S. goes, once the dust settles, the main driver in global trade will remain China, not the U.K. or even Europe. Brexit is a shock from a geopolitical perspective. But for the global economy, we think this will be a bump in the road. Our view is that the U.S. will take the Brexit bump in stride.
There are several facts substantiating this point of view:
First, and as you have no doubt heard before, we are in a very low-interest environment. Brexit has only deepened it. With the ten-year under 1.5 percent, even middling dividend payers look good, as does the stock market as a whole. There is simply nowhere else to go.
Second, although the sideways chop of the last 18 months has been volatile and lengthy, the market never crashed. This consolidation, though stomach-churning, is a positive, not a negative. It should give the market the energy to power forward as it breaks through to new highs and continues its bull run.
Third, many forget that this sideways movement was of relatively short-term duration--dog years, as it were, compared to the long sideways consolidation of 2000-2013. That was thirteen long years of no market gains at all on the S&P 500. We finally broke out technically just three years ago.
So from this longer-term perspective, we are probably now in a bull market of significant duration, painful as that may sound to those who disbelieved in the market from its crisis lows in 2009 until today, when it more than tripled. Behold the wall of worry. So many have bloodied themselves banging their heads against it.
Fourth, although the Euro, Swiss Franc, even the Renminbi could be considered safe haven, flight-to-quality currencies, the U.S. dollar retains a special allure. Denigrated for being doomed to lose its reserve currency status for years after September 11th, 2001, you don't hear such talk much anymore.
Instead, Europe and Japan are in long-term malaise and China's growth model in significant doubt. That doesn't look to change anytime soon. As Brexit unfolds and geopolitical risk remains high, and as Europe's and Japan's woes continue for the foreseeable future, the U.S. market and U.S. dollar should see continued buying pressure as people look to its safety and relative stability in a disturbed, and disturbing, world.
We use a tactical overlay on our portfolios that gives us a chance to exit the market if it gets into bear market territory. Our Quantitative Risk Indicator came very close to going defensive the last three quarters. And once again, it came close following current market reaction to Brexit. That's not surprising. But it hasn't turned into bear market just yet, and economic fundamentals indicate we're not approaching it anytime soon.
The market hasn't been positive for almost 18 months and remained in a sideways trend. This trend was a consolidation of the market for another up-leg in what I believe is the beginning of a longer term bull market that started in 2013. We would need a significant decline in stock prices combined with dramatic loss in consumer confidence to change our view. As of now, in the face of widespread jitters and disbelief, we remain positive about the markets.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.