- Created on Monday, 15 April 2013 07:00
- Published on Monday, 15 April 2013 07:00
- Written by Chris Hunter, Investment Director, Bonner & Partners
- Hits: 1016
One of the questions I get a lot these days is whether it's hard to be a stock market bear with the S&P 500 and the Dow hitting new highs.
The honest answer is that it is hard. But going against the consensus always is (otherwise, we'd all be contrarians).
There is a near-universal view today that, with the Fed in massive easing mode, there is now zero risk of a renewed downtrend in stocks.
In other words, we remain in an environment in which bad economic news means further extensions of central bank easing... and in which the "don't fight the Fed" mentality is firmly ingrained.
And it's not just "don't fight the Fed." It's also "don't fight the Bank of Japan."
The Japanese economy is less than 40% the size of the US economy. And the BoJ is doing about 70% of the debt monetization that the Fed is.
If you want evidence that central bank easing is driving stock prices, just take a look at the performance of markets in which central banks have the pedal to the metal, so to speak, versus markets in which they don't.
The S&P 500 is up 11.3% for 2013. The Nikkei 225 is up 30.3% (about 14.4%, in dollar terms). And British stocks are up 8.3%. These markets are benefiting from central bank largesse.
But look beyond these markets and you see Hong Kong down -2.8% for the year, Brazil down -7.8%, India down -5.2% and Korea down -2.8%. Hardly a global recovery now, is it?
So why do I have a bearish view on the prospects for the US stock market right now?
It's all about those non-confirmations I mentioned earlier...
For instance, earnings are supposed to drive stock market prices. But earnings forecasts for the first quarter for S&P 500 companies have dropped from +4.3% at the start of the year to just +1.5%.
And we have a 5-to-1 ratio of S&P 500 companies issuing negative versus positive earnings guidance – something last seen in Q3 2001 (right after the dot-com bust... and not exactly rosy times).
We also have a situation in which the stock market sectors that performed best over the first quarter were defensive, high-yield sectors such as health care (up 16.5% year-to-date), consumer staples (up 13.6%) and utilities (up 13.3%) as the top three.
And the growth sensitive, pro-cyclical materials (up 2.1%), technology (up 3.1%) and energy (up 8.1%) were among the four worst performers (the worst of all being telecoms, which are up just 1.9% for the year).
This shows investors aren't buying a "recovery" but are, rather, buying yield (which they can no longer find in bonds, thanks to Fed intervention).
But perhaps the biggest non-confirmation of all is US economic growth. Even with the Fed pumping $85 billion per month into the system, US GDP growth is running at an average annual rate of just 2%.
At this level, there's no chance the jobless rate will drop significantly. In fact, we could be seeing an increase in the jobless rate at this level. Yet this is the new "boom" that stock investors are supposedly celebrating?
I am NOT saying there won't be further rises in stocks as central bank liquidity continues to flood the system. I am simply warning that without solid fundamentals to back up this rally... increasing exposure to US stocks now is nothing more than a speculation on central bank intervention... not an investment in a genuine recovery.
Do so at your own risk...
And if you are still tempted to chase the fifth year of an aging bull market led by traditionally defensive sectors... with earnings either flatlining or falling... and an economy still creeping along at stall speed... make sure you're nimble enough to get out when the Fed liquidity finally dries up.
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