Over the past 18-months, the S&P 500 surged 43%, without more than a 6% drawdown. That dear reader is a Bull market. This post is somewhat backward looking based on the writing hiatus at CF. The forward plan is for content at regular interviews from here.
Where we stood:
Entering June 2012, the market stood at approximately 1,300 (S&P 500).
- Europe redux
- EM collapse
- Fed policy
- “the boat was already missed”
Since June 2012, the market powered ahead, in retrospect, making all of the above concerns appear overblown relative to the investment opportunities at this time. At a minimum, the above concerns were dramatically ill-timed.
CF’s outlook for 2012 was bullish but not enough so. In the 2012 themes post:
- No recession <check>
- Valuation matters and the market generates a 10% return <16% was actualized with dividends>
- Europe enters a period of extreme bifurcation <this happened but was rather obvious>
- China doesn’t hard land <check – it didn’t, yet, in 2012>
- Japan’s economy muddles through but the markets are up double digit <check>
- Emerging market growth picks up and markets lead <miss>
- USD rallies <check>
- US 10-yr rates rise, but oh so modestly from 1.88% <check for 2012>
With CF’s year-off, no predictions were logged for 2013. It would have been a bullish one but well below the market’s stunning +32.4% with dividends.
So now what?
Powerful, wealth-creating investment themes all have a time and a place. CJF remains bullish based on the following:
1) Valuation is ok (~15.4x S&P 500 forward earnings) – in the middle of a reasonable range, and quite reasonable provided today’s low inflation and interest rates (but headed higher).
2) Economic underpinnings look sound – the recovery has been a middling one, cautious, and full of growth-scares. The US economy has bifurcated in dramatic fashion; the standard of living of those with asset ownership rose (is rising) dramatically, while those depending on paychecks haven’t participated to nearly the same degree, if at all. Perversely, this is a positive for the duration of the recovery because the subdued nature of things avoids the creation of excesses, which ultimately cause recessions…..always.
3) Inflation and interest rates are likely to remain low(ish) for several years. Technological advancement and global demographics conspire against pricing power and this pressure is here to stay, for the foreseeable future.
4) Prettiest girl on the dance floor- the market is no longer priced to generate 30% returns short of new bubble; but this is ok. After treading water for a time, or a normal bull-market correction, returns of 5-10% in subsequent years are likely. At least until risk #2 actualizes. Stocks remain more attractive than bonds, commodities, and certainly cash.
Future writings will elaborate on these 4-themes, likely to be the drivers of market returns, and eventually, the nasty culprit causing the next bear market. As such, the above topics will hold our attention and shape considerable exploration.
But why no correction?
Investors have simply been too cautious, effectively inhibiting the market from producing its normal, run-of-the-mill 10%+ correction. It might have happened in:
- Fall 2012 – on Europe crisis fears
- Summer 2013 – on china credit implosion fears
- Feb 2014 – Ukraine and geopolitics
- All through 2013-2014 – off-again/on again QE taper fears
But it didn’t – tipping market participants that not all (enough) investors have been fully positioned for the rally.
How to position today:
- We are in the midst of a strong bull market, likely with numerous additional innings, yet the market is stretched, and the lack of a normal pullback is scary for seasoned investors.
- A pull-back is due: it could easily be a sharp/scary one, or we could continue to just see more single-digit pull-backs followed by new highs; the result of investors using pullbacks to get invested.
- CF continues to position for a bull market but will be quick to pivot to a combination of income strategies, covered call option writing, dividend capture trades, and profit taking, as valuations push higher.
- Some conservatism from here provides fire power to buy dips.
- It is sensible to take advantage of smaller dips when they come but also to prepare for the possibility of a real dip (1,000-2,000 DOW points) which should not be a surprise in 2014 given the one-way nature and strength of the market move.
Thanks to all the encouraging reader emails over the past year – it’s good to be back!