The Beginning Of The End

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by: Bill Kort

Or, is it the end of the beginning? Or, is it, as stated in the eloquent and somewhat humorous words of Sir Winston Churchill, "… not the end. This is not even the beginning of the end. But is perhaps the end of the beginning." This line was delivered to the attendees at the Lord Mayor's luncheon, November 10, 1942. It actually drew a chuckle from the assembled mass celebrating the installation of the ceremonial Lord Mayor of London.

It was a time of better spirits and hope for Great Britain as she had just been victorious over the Germans in the Second Battle of El Alamein. My title does not evoke hope and is reflective of almost 10 years of negative press given to a secular bull market that has never gotten any respect. Do not despair. This article will have a positive conclusion… I think.

Negative press persists and swells as our recent correction has taken hold

Enter the commentary of former-perma David Rosenberg who got it right (maybe) in 2008, mainly because he turned negative on the market in 2004… a stopped clock is at least right twice a day. Now when Rosenberg turned negative, the S&P 500 was trading around 1132. In the next 3 years, it rallied to a high of 1550 before collapsing to 666 in March 2009. The problem is that he was still negative saying we were in a depression in August of 2010 after the market had regained most of the loss (S&P -1087, down only 45 points from the 2004 warning).

He was still negative in 2012 when he posted this commentary about Quantitative Easing (QE) and how it was not going to work (S&P 500 at 1422, 12/1/2012). By October 2013, Rosenberg had had an epiphany, shifting from a long-held investment strategy of Safety and Income at a Reasonable Price (SIRP - A strategy for a deflationary environment) to HIRP (Hedge Inflation Protect Risk - a strategy for what Rosenberg perceived to be a burgeoning inflationary environment).

With this seismic investment shift, Rosenberg jumped on the theme that rates would rise as result of predicted inflation and wholeheartedly recommended bank stocks, many of which had already doubled off their 2009 lows. Also, by then, the S&P 500 was making new all-time highs (10/1/13-1720). My question is why does Mr. Rosenberg, with his shoddy track record, consistently get call-backs from the media soliciting what looks to be his very questionable advice. The only thing I can come up with is that bad news sells. It's more engaging than good news.

Rosenberg's latest pronouncement on CNBC is "This 'elephant in the room' could slam stocks…" Does this get your attention? if you are the least bit concerned about your investments and the market it just might. Rosenberg worries that the unwinding of Quantitative Easing (QE), the Fed selling off the huge bond and mortgage-backed portfolio it acquired to facilitate QE would cause rates to jump. He argues that the Fed may not have to do anything with the Fed funds rate.

Shrinking the Fed balance sheet (sucking liquidity out of the system) will have the same effect without having to telegraph rate increases after each FOMC meeting. Remember, he said QE would not work. I'm not sure if it did or not but it seems we are in a much better place today than we were in the dark days of the financial crisis when the program was initiated. Likewise, my bet is that Rosenberg will be just as wrong on the draw down of QE.

The main point of all of the above is to say that it does not look like we have put in a major secular bull market top from the point of view of sentiment or the fundamentals. Investors are skittish, willing to sell on the hint of higher rates or slower economic growth. There has never been anything close to "irrational exuberance" during this entire protracted advance. If this bull dies from skepticism (versus Euphoria) it will be a first.

On the fundamentals one of my favorite reads, Fear and Greed Trader, asserts in his most recent post, "History has shown that major bear markets result from 1) recessions, 2) commodity spikes, 3) aggressive Fed tightening, 4) extreme valuations, and 5) excess that eventually needs to be worked off."

Just can't get to any of F&G's 5 reasons from here. As a counterpoint to my assessment and the assessment of the Fear and Greed Trader, the vast majority of so-called experts, like Mr. Rosenberg would disagree with much of what I have laid out in this paragraph and they have been wrong for the past 10 years.

Meanwhile, stocks continue to levitate off their recent lows

The Dow Jones Industrials were up another 288 points today (on top of an anticipatory 200+ point move Friday) on the not-so-surprising news from the President that he had struck another amazing trade deal (verbal) at this weekend's G-20 meeting… very sparse on details, but a trade war with China now appears off the table for at least 90 days, the market breathes a sigh of relief. Why all of this was not-so-surprising… the President had a bad news week going into the G-20 and needed a pick-me-up. Hopefully, this does mark the end of trade hostilities between the US and China.

In the final analysis, much of the above is just noise. It is important to just be there, invested in equities in a percentage of your portfolio that is suitable and comfortable to your circumstance. So, is this the end or the beginning of the end or the end of the beginning? Forget about these questions. Trading is hard. Just be there!

John Pierpont Morgan founder of the feast

According to a study prepared by JP Morgan if you had been fully invested in the S&P 500 during the 20-ear period between January 2, 1996 and December 31, 2015, your rate of return would have been 8.18%. If you had missed the 10 best up days in that period, your rate of return would have dropped to 4.49%. Here's the kicker, 6 of the 10 best days came within two weeks of the 10 worst days (days that you may have been scared out or traded out of the market)!

What do think?

P.S. Tuesday 12/4/2018… The DJIA was down 799 points (3.1% ) with the S&P 500 and Nasdaq down 3.24% and 3.8% respectively. Yes, economic growth should slow in 2019 after the tax cut-induced surge of 2018. Yes, rates will probably increase somewhat (interestingly, the yield on the 10-year Treasury has dropped about 10% since 11/8/18 peak of 3.24%). The operative fact here is that fear of sharply rising rates, the prime mover to begin this correction, has turned out to be misplaced.

Yes, the 2 and 5-year Treasury yield curve inverted, something that has been seen before in strong economic environments (not presaging recession). Yes, after boasting of negotiating a great trade deal, the President warned if progress was not made, the deal would be off. None of this is new news! A year ago, at this time, the pundits were complaining about a lack of volatility… be careful what you wish for.