If some experts think we’re buying stocks in a bubble but others such as the US-based Citi are telling their private clients that they think the US economic comeback will be faster than most others think, well it leaves the DIY fund managers — us — in a bit of a dilemma.
In tonight’s Switzer TV Investing, we tried to get two fund managers to take bull and bear roles in what we thought would be an engaging debate, but they both pretty well agreed!
Roger Montgomery of Montgomery Asset Management and Rhett Kessler of Pengana Capital Group both admitted to being buyers post-March 23, when our market bottomed. But they now are worried that retail investors have taken the rally too far.
One of my debaters even thinks the millennials are more responsible for the rally’s excessive rise but I’m not interested in the blame game or who’s doing too much buying. My concern is more along the lines of being OK with this rally and being comfortable that the legendary Boston-based fund manager, Jeremy Grantham, who has dubbed this share-buyer spurge as a “Real McCoy bubble” is being too negative or not. And other heavyweight market experts have agreed, however, this is what Citi clients received a couple of weeks ago: “Citi Private Bank expects a more rapid economic rebound than many others,” it proclaimed. “Following the markets’ powerful rally since March’s lows, Citi Private Bank notes that beaten-down bargains are less widespread than in previous new cycles. That said, the Mid-Year Outlook report identifies many markets and assets with greater rebound potential. Among them are emerging markets, small- and mid-cap equities globally, and certain ‘COVID cyclical’ sectors (including banks, real estate and traditional retail) that were hard hit and will be impacted for longer due to the pandemic-driven shutdown.”
And for those sitting on cash, hoping for a second leg down, this is what David Bailin, the Chief Investment Officer at Citi Private Bank said: “We encounter many investors who believe they have ‘missed the boat’ after the rapid gains in markets since March…[and] as a result, they are sitting on excess cash, hoping for another opportunity to invest at lower levels. Mid-Year Outlook 2020 not only highlights the folly of such market timing attempts, but also sets out many opportunities for putting cash to work as this new cycle begins.”
Of course, David could be wrong but I just wanted to show that smart people are divided on whether you can expect a sizeable second leg down and if it’s wise to play the waiting game.
I’ve said numerous times that a shocker second-wave problem could rock the stock market and June and July should be sufficient time to test out what lies ahead. Will it be a quicker-than-expected return to normalcy or a longer-than-expected bounce back, with the bad infection news likely to fuel a sizeable leg down.
Infections in Victoria over the weekend have slowed up the reopening of that economy and US infection news will serve to keep a lid on stock market enthusiasm this week.
I’m only an economist and so medical/pandemic forecasting is not my long suit. However, coping with any sell-off will be easier if you bought stocks recently expecting a slow pay-off over the next few years, even if the recent returns were bigger and faster than you gambled on.
I’ve been a buyer but any significant sell off will be met by me in the following ways:
- I bought for the long term, so a sell-off is annoying but manageable.
- I might buy more at lower prices, which of course is dollar-cost averaging.
- And I’m beyond panicking about stock prices that often irrationally go up and down.
That’s the way I look at the worst-case scenario and clearly the best-case scenario will simply bring me material joy – but I can wait for that, if I must!
But what about this bubble contention? Work from CNBC’s Mike Santoli is worth sharing with you.
This former Barron’s columnist is a good analyst and notes how a number of fund managers and legendary investors have doubts about the magnitude of this rally, especially noting how Oaktree Capital’s Howard Marks, who I watch closely, has observed that: “fundamentals and valuations appeared to be of limited relevance.”
He also thinks the positive upside has been given a surprising amount of benefit when it comes to doubt. And Santoli is not over-the-moon about how popular apps powered by people who have no discernible market knowledge are telling novice traders that “Stocks only go up!”
All this explains why US stocks are only 8% off their pre-COVID-19 highs and the forward P/E is a big 22. But how does this compare to the past?
Santoli says previous bubbles feature “pervasive optimism about future profits” but now we see “persistent scepticism by traditional retail investors, as gauged by the predominance of bears over bulls in recent American Association of Individual Investors surveys.”
Before the dotcom bust the Nasdaq 100, which is now trading on a forward P/E of 28, was at 80 in 1999! The Index has gained 125% in five years but it did that in one year before the March 2000 smashing!
But what I love about Santoli’s work is this chart linking the stock market to the real world, which shows how the latter can be bad and negative, as in 2009-10 after the stock market started rebounding on Wall Street.
For years after the market bounced off the bottom, experts, hedge fund managers and legends pointed to the disconnect between Main Street and the stock market, as shown by the Consumer Confidence green line and the S&P 500 blue line. But the former real world eventually caught up with the ‘unreal’ world of the market.
Santoli’s analysis says, quite rightly, what we’re seeing now is not like past bubbles “that distorts capital allocation and foretells profound losses for years to come.”
The crash was pandemic and government-policy created. Provided the infection rates don’t go mad crazy, pullbacks are probable within the context of a rebound in the market, and that’s all, as normalcy creeps back.
The bear case hinges more on second-wave infection disasters that legends and fund managers have no real expertise on, like me. It’s all guess work right now, and even if we and Citi get it wrong, we will only be wrong for a time before a vaccine or treatment give birth to a new big rally to send the value of recently and past-collected stocks to new highs.
In contrast to those new age urgers who are telling the inexperienced that “stocks always go up”, I argue, as long as you can afford to wait, the stock market will go up.
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