I've mentioned here more than once how important it is to keep tabs on expectations of market participants. You can quantify expectations to a degree by looking at earnings estimates, price target and such; you can also try to get a sense of what the narratives are from the pundits and media but in my opinion the most important thing to look at is what people are are actually doing with their money. People will only truly embrace expectations when they put their money where their mouth is. Post election there has definitely been a notable upward shift in expectations when you look at recent trends in fund flows, margin debt and IPOs/SPACs. You won't find a shortage of market watchers claiming how all of this is ominous for the market. I share these concerns but for now, it's a short to medium term concern. Is the market primed for a 10-20% correction? In my opinion yes. Conditions are such that the door is open to this. I felt a similar way coming into 2018 but my conviction level isn't as great this time around. In my opinion, we could soon see something along the lines of what we saw in the spring/summer of 2010 whereby we had a massive relief rally given how the world didn't in fact come to end but then complacency/greed crept in too much and a cleansing of this froth was necessary which started off with the flash crash.
On a longer term scale, there's still more room for more people to ""get in the pool". Yes, fund flows have spiked, but that's coming off a period of chronic flat/negative flows for 2 years. If you look back from when the bull market of 2009 began, equity fund flows have been pretty tepid generally since then. The speculative actions of millennial traders are not representative of the sentiment that exists from the baby boomers (who control far more money) and institutional money. Yes, sentiment is more bullish overall from these 2 groups of folks but it's not as extreme. The other thing that prevents me from believing we are near a major bull market top i.e. a la 2000 or 2007 is because monetary and fiscal policy are extremely accommodative now whereas it was restrictive then. And although the narrative has definitely shifted to a more positive tone, there's still lingering concerns in the back of most people's minds about COVID and the recovery and it probably wouldn't take much to inflame those fears. When you look at the conditions near major bull market peaks of the past, it tends to be nothing but blue skies ahead.
It's a very peculiar market we find ourselves in right. now. The excesses in SPACs/IPOs is clearly a red flag but normally you would see such behavior near the peak of an economic cycle i.e. a after a long period of low unemployment strong growth. Can it be possible for us to get a cleansing of this froth and yet have the bull market still be in tact? I think the answer is yes for the reasons I've already mentioned. Outside of COVID we've had some scary corrections since 2009, 2 of which were 20%. Those corrections proceeded periods of froth not unlike such as what we see now. So long as earnings in general don't collapse;, i.e. there's no financial crisis which leads to general mass deleveraging and bankruptcies, any corrections that do happen, severe as they may be, should only remain just that - corrections and not the end of the bull market, simply because the fixed income markets don't provide an attractive enough alternative.
I think it will be important to be tactical in the coming weeks/months but stick with long term high conviction themes i.e. clean energy and energy efficiency.
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