Froth
Posted on Sunday, November 17th, 2019
We are always looking to history as our guide as markets can be an emotional animal and we, as humans, repeat our patterns. From DataTrek, by way of Arthur Cashin, comes Nick Colas and Jessica Rabe’s analysis of what follows for markets after a good year. For the last 90 years the average total return for the S&P 500 after a 25% gain is 9.4%. They found that the odds of a really big loss for the next year are quite low from a historical perspective but the odds of having a positive year for the S&P are slightly less than normal. Good news – bad news. Huge advances in the S&P 500 seem to bring forward returns but the positive vibes keep coming.
Small caps and transports refuse to budge out of their recent ranges. It is hard to argue though as the S&P break higher is dragging financials, tech and health care with it. The Fed is dragging us all back into markets with their adding to liquidity. Know the risks. Bank of America nails it here with their thoughts on the market. The music is playing and we have to dance we just get the feeling that at some point there won’t be enough chairs.
“the last financial crisis was in part fueled by the Fed’s reluctance to tighten financial conditions as housing markets showed early signs of froth. It seems the Fed’s abundant-reserve regime may carry a new set of risks by supporting increased interconnectedness and overly easy policy (expanding balance sheet during an economic expansion) to maintain funding conditions that may short-circuit the market’s ability to accurately price the supply and demand for leverage as asset prices rise.” –Ralph Axel Bank of America
Here are some interesting observations from Michael Hartnett over at Bank of America. Apple’s market cap is now larger than the entire US energy sector. Disney’s market cap is now larger than the top 5 European banks. When divergences open up like this it usually pays to be a bit of a contrarian. Right now we are seeing investors adding to their European and Japanese holdings and rotating away from the US a bit.
Corporate insiders in the US are dumping stock at a rate not seen since right before the Dot Com bubble burst back in 2000. This is now the longest bull market in history and the GDP is about to print less than 1% which is dangerously close to contraction territory while the earnings growth for US corporations is turning negative in the fourth quarter of 2019. But since when have earnings mattered? Not since the dawn of QE in 2009. Well, here we are again. The Federal Reserve is once again pumping money into the system at a very rapid rate and stocks are responding. The Fed has added $288 billion into the system in the past two months and will continue to add for the next six months. This is the fastest rate at which the Fed has added liquidity since 2013. So you don’t have to Google it the S&P 500 went up 29% in 2013. A bit overbought but you can’t fight the Fed. The market melt up in early 2018 may hold some parallels.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.