Extreme Greed
Posted on Sunday, December 29th, 2019
It’s been a good deal of fun watching our clients’ account values go up and up these last few months. Why is the market rallying week after week? The problems in the REPO market approaching year end have the Federal Reserve back in the Quantitative Easing business. If terms like REPO and QE have your eyes glazing over just remember that the reason that QE is important is that it causes inflation in asset prices and pulls returns forward. Since the most recent launch of QE in mid October the S&P 500 has closed higher in 10 of the past 11 weeks. Not so coincidentally, the Federal Reserve’s balance sheet has grown in 10 of the last 11 weeks. The one week that the balance sheet had a drawdown the S&P did as well.
We are currently at the extreme opposite of sentiment of last December 2018. CNN’s Fear and Greed Index (which I highly recommend following) was 3% last December showing great fear in the market. I was a buyer last Christmas Eve. That index now sits at 93% showing extreme levels of greed. Remember, we take the stairs up in the market and the elevator down. Greed lasts longer than fear and greed may very well continue into the New Year as central bankers in the US flood the market with liquidity. They have committed to that liquidity until the second quarter of 2020. Investors won’t stick around for the end of the show so be aware that everyone knows the commitment is to end QE around tax time. Don’t get caught watching the paint dry.
We love to read Barron’s the investment weekly. We don’t usually pay much attention to their survey of Wall Street analysts target for the year. What we found striking this year is of the 14 analysts, who are perpetually bullish and sometimes comically so, not one has a target of more than 5% higher for yearend 2020. The consensus is for no growth at all and a close of 3264 on the S&P. The S&P stands at 3240 as we write. We could see a year similar to 2018 with a market that has higher returns early and spends the rest of the year trying to hang on.
Enjoy the higher prices for now. 2020 could be a long slog with increased volatility. We have stayed away from emerging markets and international equities for the better part of a decade preferring returns here in the good old US of A. 2020 might be a time for a change.
Merry Christmas and Have a Happy 2020!! We are writing our year end letter and will expand further on what 2020 may have in store.
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.