Where are the bears?

hibernating_bear_-_google_searchBy David Nelson, CFA

The battle between Bulls & Bears was raging long before the Buttonwood Agreement was signed by 24 brokers in 1792 looking to establish a commission rate to charge clients. Some consider the event the early beginnings of the New York Stock Exchange.

Most investors know the long term prevailing trend for markets has been higher but that nothing goes up in a straight line. They understand Bulls & Bears both play a role in the ebb and flow of markets. Lately, it just feels like Bears are missing from the conversation. Maybe they’re hibernating or just disgusted with how the game was rigged against them by an organization with deeper pockets, the Federal Reserve.

Don’t get me wrong I’m not hoping for their return but paraphrasing Woody Allen, maybe I’m just a bit uncomfortable being in a club that wants me as a member.

AAII Investor Sentiment Bullish Readings

It’s certainly a good start for the year with markets (SPY) in the green but there are some clouds on the horizon that should give investors pause. The post-election rocket higher in risk assets is matched only by the violent move higher in sentiment. AAII Investor sentiment readings are the highest in 2 years coming off lows pre the election.

President Elect Trump
trump_-_google_searchIt’s not unusual for sentiment to improve as markets push higher but it’s important to note that market targets put out by Wall Street are being lifted primarily on potential changes in Washington. Much of that change is going to take time no matter how fast the President Elect comes out of the gate. A pro-growth agenda can go a long way toward boosting economic output but tax reform, regulatory relief and an infrastructure spend will need time to get through the legislative process. Given the rhetoric coming from both sides of the aisle I’m not exactly looking for a “Kumbaya” moment anytime soon. The battle will be long and harsh leaving casualties along the way.

New tax policies being proposed like a “destination based cash flow tax with border adjustment” or D.B.C.F.T could have a dramatic impact on the economy, trade deficit, and U.S. jobs and of course markets. However, it’s important to remember the devil is in the details and we’re going to have to rely on economic models to make final judgments. Most new legislation and programs come with unintended consequences.

In a November post discussing the dark side repatriation I talked about some of the titanic forces likely to support the bond market. In a note late last week Goldman (GS) strategist David Kostin puts it a different way. …we expect minimal asset rotation away from debt and into equities for two reasons: (1) Many categories of investors are restricted from allocating assets away from bonds. (2) Investors such as pension funds and households that have latitude to shift assets have debt allocations that are currently at the lowest level in 30 years.


In a vacuum, U.S. Treasuries are an accident waiting to happen but in a world still pushing the merits of negative rates they’re hard to ignore. The spread between the U.S. and German10 Year Rates is the highest since 1989 helping keep U.S. bonds a desired asset for those who have to own fixed income (TLT).

Supporting the bull thesis the push for regulatory relief seems real and easy to follow using the S&P 500 Financial Sector (XLF) as a proxy. But even with a GOP controlled congress nothing is going to come easy.

Also supporting the bulls, 12 month forward estimates for the S&P continue to push higher and oil which played the role of leading indicator for the last 2 years sits near the highs well above 50. Look, no question there’s a lot to be thankful for and it’s pretty comfortable here in the bull campsite. Maybe, just a bit too comfortable.

*At the time of this article some funds managed by David Nelson were long SPY