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Markets have had quite a year so far. That, of course, has led to a lot of discussion. Are stocks primed for a fall? Bonds? Or is there more juice in the tank?

Frankly, it’s pretty easy to find bearish arguments. Stocks are now quite expensive historically on many measures- P/E, margin-adjusted P/E, price to sales, and so on. Breadth is narrowing, volume is weakening, weak bond yields are indicating trouble ahead, and the last decade’s stock returns are unusually high. Macroeconomic indicators have weakened sharply and earnings growth has slowed markedly. In the last few months, well regarded financial professionals such as Ray Dalio, Jeffery Gundlach, and David Einhorn have pointed out how expensive markets are. I have to admit, I stand there as well. I generally model out possibilities to figure out if things are likely to get better or worse, and to me it’s really hard to figure out how the data get better anytime soon.

That said, people have been pointing to overvaluation for years, and yet the stock market recently hit new highs. Thus, so far the bears have been wrong. What are bulls saying? The bull case seems to involve momentum, Fed dovishness, stock buybacks, and a trade deal. Let’s go through those.

Momentum is interesting. Admittedly, it’s hard to know when momentum stops. Most momentum strategies seem to use a 3 to 12 month lookback period to compute momentum, so they would mostly look pretty good right now. The problem is that by that logic stocks should never stop going up, which doesn’t seem realistic. Of course, I’m not the first to realize this, and there is research out there saying that the overall momentum (including the 3-12 months lookback period) lasts 14 to 18 months (lookback period plus investment period). At this point, it’s probably fair to say we’ve been going up way longer than 18 months, though I suppose you could have killed the clock and restarted it last December. By that logic, I suppose upside could continue until June 2020. That said, after a 20% gain in seven months and a 300% return in the last 10 years, I have to wonder how high our expectations should be.

How about Fed dovishness? The latest market upswing sure seems like it was caused by prospects for the Fed to get more dovish, whether you start from Fed Chair Jerome Powell bending dovish in late December or the recent bout in early July. It’s certainly seemed like it had an effect, but should it? The last two easing cycles didn’t have a positive effect. In 2001, the Fed started cutting rates while the market was already going down. The market paused the downside for about a month, but two months later it was lower than it had been. In 2007, the first cut largely coincided with the market starting the downward trend.

But could this current cut be an “insurance cut” like we saw around 1996? Like now, the market was essentially at an all-time high then. In that case, the market continued to go up pretty solidly. That said, the same setup was seen in 2007, and that was a disaster. The difference, in my mind, is that 1996 saw an improving economy while 2007 saw an economy in trouble. To me, the economy seems to be what’s important, not the Fed’s reaction to it. In today’s case, we have a worsening economy.

Third, company buybacks of their own stock have been increasing for years, and have certainly been a significant source of buying power. According to Deutsche Bank, buybacks have been responsible for about $200 billion of purchases a quarter (gross) over the past year. I admit there aren’t yet clear signs that this is slowing down, but the last year’s worth of buybacks have been record breaking. Should we expect that to continue? The last two times we had modest earnings slowdowns (2011 and 2015) we saw a pretty negligible impact on buybacks, but 2008 killed them. What happens this time? Based on history I’d think at best we get more of the same, and honestly I doubt we even get that. Is that enough buybacks to drive the market even higher?

Lastly we have a trade deal. Never mind the odds of a successful resolution, let’s just assume that it happens. Admittedly, it’s hard to know exactly what that looks like, but I think it’s a fair base case to say we get back to where we were on trade volumes. That’s an improvement, but thus far we haven’t really seen a whole lot of market negativity from the trade war. I suppose you could blame the trade war for weak semiconductor sales, but the market seems to already be discounting that as temporary. For instance, Texas Instruments (TXN) has had their sales and earnings go down, but they still trade very near an all-time high. Thus, while I expect we’d have an initially positive reaction to a trade deal, I wonder if ultimately you’d get a “sell the news” reaction.

That’s the basic bull/bear dialogue, but I can’t help but feel like it doesn’t really describe what’s been going on. Why has everything gone straight up? Are we looking at a blow-off top? Is there no reason to worry, and everything is fine? Where might the market be going, and why? Contemplating these questions will be the focus of my next The Bulls/Bears Dialogue blog.