As anyone who reads this blog knows, I’m emphatically bullish about America, its economy, and the stock market. To bet against America means betting against the best and brightest individuals that comprise it. It means betting against Web 2.0, high-IQ people, MIT & Caltech, competent policy makers, the tireless consumer, exports, favorable demographic shifts, and a hyper-meritocracy that rewards the best and the brightest. Dow 20,000 coming up.
A few days ago I came across a list of reasons to be bearish in 2015, which I easily countered:
- junk bond spreads widening while treasury spreads tighten
- small cap stocks underperforming mid caps, which underperform large caps, which underperform mega caps
- market breadth (NYSE) getting thinner, with fewer new highs when the market as a whole makes new highs
- emerging market stocks selling off
- Utilities and consumer staples outperforming consumer discretionary and energy
- commodities doing poorly, mainly commodities used in manufacturing
- Volatility increasing and becoming more frequent; big stock moves up and down, one after another
- Yield curve flattening
These are easy to counter:
Junk bonds are weak because of falling oil prices. A lot of small, speculative energy companies issued junk bonds when oil was >$80. Yield hungry speculators bid up those bonds. This is really a symptom of sector-specific poor management and speculation than overall economic weakness.
Small caps may not offer a good risk/reward ratio. People see large caps as having better growth relative to risk than small caps. Small caps are too volatile. Then you have the whole issue of false positives in that most of the time when small caps lag there isn’t a subsequent bear market. Either they catch up later or the bull market continues without the help of small caps.
This tends to be cyclical, with lots of false positives. 95% of time when breadth is weak, there isn’t a subsequent bear market.
Emerging market have been weak since 2011. Emerging markets actually have worse inflation adjusted growth than the US, which makes them a worse value. Then you have all the political instability and other risks.
This is not bearish and there are indexes that he didn’t mention that are making new highs. QQQ, a technology ETF, is at record highs. Same for the retail etf, XRT. Same for the biotech and healthcare ETF, XLV & IBB. Keep in mind that at any give time, in bull or bear markets, there will always be at least one or two sectors that will lag.
Commodities did poorly in the 80’s and 90’s too. That didn’t stop those bull markets. The price of commodities has less to do with demand and more to do with supply. When prices go up more supply is added and prices fall again, regardless of consumption. There is some element of speculation that goes into rising commodity prices
VIX index is quite low actually
Actually, the yield curve is steep. Short term yields are close to zero and long term ones are around 3-4%. A flat yield curve is when short term is the same as long term. The curve was flat through large parts 90’s bull market as well.