El Niño has been bringing tepid temperatures and creating a beautifully warmer winter to most of the nation this year, and it’s spilling over to the stock market. Just as the majority of Americans braced for the harshness of winter this year, most investors were expecting the bear market to again rear its ugly head. In reality, neither makes any sense. Winter is as usual winter, but the stock market is fighting an uphill battle and a slew of bad news.
For the immediate future however, investors should be prepared for a pullback once earnings season is over, the post earnings blues. We have had a trend for the last several years whereby the market has sold off just before earnings releases due to expected negative surprises, rallied during earnings as they have consistently beat expectations and sold after afterwards… and that’s where we are right now.
However, the resilience of the market mixed in with a few positive factors should provide further strength for stocks.
• The market is enjoying a respite to the European mess and is focusing on the recent better than expected economic news.
• The January barometer, which implies that a good early January is often good for the stock market, has been strong and is discussed in All’s Well That Begins Well.
• It is an election year and the typical election year gain for the S&P 500 Index since 1949 is +6.1%.
• The last three times there was an incumbent Democrat in the White House running for re-election (Bill Clinton in 1966, Jimmy Carter in 1980, and Lyndon Johnson in 1964) the market made double digit gains of +20.3%, +25.8% and +13%, respectively.
• Bernanke and the Federal Reserve Board toss us a QE3, which is likely once QE2 wears off in the next few months.
Long shots for a new bull market:
• Every bear market is followed by a bull market. Some believe the world and most US indexes went through a bear market in 2011, leaving us at the start of a new bull market. The average bull market move in a secular bear market is +70% over thirty two months. The weakest bull advance was +48% and the shortest bull were twenty four months. Currently, the new bull market here is just three and a half months old and only up +17%.
• From a contrarian view point, stock valuations reflect a lot of pessimism. Looking at money flows, one would say that the pessimism is excessive: currently over 8 trillion dollars are in money market and federally insured short term accounts at banks, yielding almost nothing in returns. However, I have been hearing the argument that there is an enormous amount of cash sitting around for my entire 27 years career in wealth management.
Now, keep in mind one very important lesson on investing: things work until they don’t… and although all of the above can give you a sense of security to be in stocks, none of them are exactly based on firm, fundamental, or technical research. We must all be aware that the above mentioned will prove irrelevant in a matter of seconds when (not if) any of the major potential crisis erupt such as:
• Greek and/or other Euro defaults or even potential defaults.
• Another slowdown in the US economy, which is likely once the effects of QE2 have passed and slower consumer spending as all of the baby boomers will pass 50 years old by year end.
• A recession in Europe.
• Negative earnings surprises and earnings due to a continued sluggish US and European economy.
• Congressional gridlock (Time to vote no incumbents).
All of this said I still believe El Niño will return to the market once we get through the post earnings blues, but with yields so high on income and dividend stocks, I do not believe the risk is worth it. With yields of 8-10% available out there if you know where to look, why take on all the risk. Ignore the hype when the market is rising and focus on what your portfolio “needs” and take the least amount of risk possible to get there.
Everybody wants to be in stocks when they are rising, but nobody wants to be in them when they are falling, and you can’t have it both ways. Nobody can time the market. Investor wasteland is littered with those that have tried and there are many famed investors in that category. In the last year, we have had a number of legendary hedge fund managers such as Stanley Druckenmiller, George Soros and Javier Guerra all call it quits, saying this is the toughest market they have ever been in. Perhaps John Paulsen should be listening. Just a couple of years ago he was considered the best manager on the planet. In 2011, he lost 52%!
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