Our prediction for the continuation of the trading range in last month’s edition of the “Crouch Connection” didn’t take long to be proven wrong. We quoted Mike Gibbs, one of Raymond James’s resident market experts, saying “that it is difficult to make a case here for a significant move to the upside or to the downside”. The trading range between Dow 16,000 and 18,000 has now been breached and, as I sit down to write this edition, we find ourselves above 18,500.
We also stated last month that, from here, it was “All About Earnings”, but to be honest, we haven’t really learned anything new from the second quarter earnings reports. With 82% of the quarterly earnings reports in the books, earnings for the quarter have marked the 5th quarter in a row of negative growth, pretty much in line with expectations. Guidance for the next quarter continues to be subdued. So what is propelling this market higher?
I have to give credit to Jeff Saut, Raymond James’ Chief Market Strategist, who has been consistently bullish in recent months. Jeff has stated repeatedly that the market low in March, 2009, began a new secular (long-term) bull market that has “a lot farther to go”. On July 25th, he reminded us:
"Secular bull markets tend to last 14-15 years and compound at 16% per year (on average)."
“So what's driving this bull market? One of the drivers is that very few believe we are in a secular bull market. This is reflected by the highest cash balances in portfolios since 2001, according to CNBC. This is not the way bull markets end. Sir John Templeton once said, "Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria." Clearly we are nowhere near "optimism" and likely years away from "euphoria"
One of the hardest lessons to remember in this business is that your emotions are usually your worst enemy. In 1999, when everyone was convinced there was an easy fortune to be made investing in technology stocks, they were waving the red flags in our face. In 2007, when no one believed you could lose money investing in real estate, we were at the top.
In 2009, when I was having daily conversations with clients who were convinced that all money invested in the markets was going to be lost, we were being offered the greatest opportunity to make money in a generation. And in January, when I thought we were headed for a recession, I missed a buying opportunity, although it seemed like it only lasted about an hour!
So, if you are worried about what Donald Trump might do in the increasingly unlikely event he is elected President; if you are convinced that four more years of Democratic policies will bankrupt the United States of America; if you are worried about the Central Banks of the world using unproven monetary policy to keep the global economy from running off the rails; if you are concerned about the enormous debt bubble that China has accumulated to prop up their fragile economy (my favorite)…just check your emotions and relax!
The overwhelming uncertainty that we all seem to feel is probably one of the best indicators you can find…it probably means that we are almost certainly more likely to see the markets going higher than to experience the next bear market in the near future.
Don’t get me wrong, I still keep my eye on what I consider the major fundamental factors that drive the cycles of our economy…interest rates, inflation, big moves in commodity and oil prices, an unusually strong dollar, or a market that goes too far too fast. We still want to keep portfolios balanced between the “safe haven” stocks and more cyclical companies to reduce volatility during the inevitable corrections, and dividends will always be important to add additional stability and income to our portfolios.
To use an old Buffett quote again:
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
We still have several factors to be thankful for. The lowest interest rates most of us have ever seen means the American consumer can buy homes and automobiles with very attractive financing. Corporate executives can finance their growth and expansion plans with extremely attractive financing. And the Fed will have an extremely difficult time making a case for higher interest rates.
Call us if there is any way we can assist you. We are always happy to meet or talk by phone if you need guidance or a listening ear. We appreciate your continued support.
Views expressed are those of the author and not necessarily those of Raymond James Financial Services and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss.