Since my last post we saw the market decline a little bit and then stage another rebound. Markets have been going sideways for the last 4 months. Bears will say that the market is topping while bulls will say that the market is just consolidating after that torrid run from September to January. I'm siding with the bulls at this point. What I see here is a market that is adjusting to a higher interest rate environment and with the economy showing no material signs of stalling with inflation still under control it's too early to say that the economy has hit a cyclical peak which would usher in the next recession. I still think there is a reasonable possibility of some scare in the market in the coming months that sends it below the 200 DMA and really flushes out weak holders. That type of cleansing would go a long way to propel the market to significant new highs. Of course, the market doesn't always give us what we want or when we want it.
I also think that the prospect of 3-4 rate more hikes by the fed won't happen...at least not as quickly as the market is pricing in. It simply seems too much too soon especially when the rest of the developed world i.e. Europe still hasn't followed suit. I think the Fed is a lot more mindful of the consequences of raising rates too quickly and inverting the yield curve.
I've been hearing/reading a lot about how the consensus view from economists is that a recession in going to happen in 2020. When have these "experts" as a whole ever correctly predicted a recession? The answer is never. Given the motto of this blog which by now you should be a believer in after the countless number of times the market has humiliated the consensus view, we should expect a recession well before or well after 2020. What would be more surprising? To me it would be the latter.
Another thing I keep hearing/reading a lot about is how we are late in the cycle and that we need to position portfolios accordingly? Really? Were these same people telling you 6-7 years ago that we were early in the cycle and that you should be super bullish about the market? Of course not. The consensus has been chronically underestimating this bull market cycle from day 1. Yes, there have been times when the consensus felt bullish like what happened in late 2017 but the market corrections that followed extinguished such bullishness and turned it back to cautiousness/pessimism and we are seeing this process play out right now however I don't believe we have reached an extreme yet. Deep down people are looking over their shoulder for the next bear market/recession and like I said, I believe it will either happen a lot sooner or a lot later than 2020 unless the consensus view shifts in the future.
If we go back to 1994 and 2004 you will see that we are similar phase in terms of the interest rate cycle whereby rates were rising for the first time in years from recession low levels. The markets had turbulence during those 2 years and basically traded sideways the entire year. Once the market sensed that the economy was able to handle the rate hikes without stalling much and that the fed was going to stop raising rates for the time being, the markets took off again to make new highs.
I ask myself, where could I be wrong here? Didn't we see some classic signs of a bull market top like the cypto bubble bursting and the January blow off top fueled by a mad rush into ETFs? It's certainty possible but my gut says to be skeptical because that could very well just have been a flash of euphoria and there's room for more before we truly reach an extreme. I never got the sense from the media or from the investing public that they have truly, fully embraced the bull market. Plus, monetary conditions are not tight which is what you also see at the peak. What the January peak could very well represent is similar to the 1987 peak whereby structural bull market conditions were still in tact (growing economy, non-tight monetary conditions) but investor optimism got too high and Mr. Market had to punish them. When the market hit bottom after the 1987 crash, optimism turned to deep pessimism. People feared a recession and even a depression would be immanent as comparisons were being made to the crash of 1929. Perhaps we will see this type of deep pessimism before this consolidation phase that started in January has truly run it's course.
