The US market is off to a strange start in 2011 continuing a nice run that started months ago. At the same time the economic data seems to point more toward malaise in terms of jobless claims, retail sales, certain components of the CPI and just about any number you can find that relates to housing. Sentiment seems to be a mixed bag depending on the survey in question.
If you read sites like Bespoke Investment Group or other number crunchers then you may know that the equity market is setting records or on the verge of setting records for number of days above certain moving averages, days without a large decline and other things that are sort of below the surface. It is important to understand that this is occurring at a time while the Fed is targeting asset prices; I read one sarcastic post during the week that said the Fed should just buy SPX futures directly and cut out the middle man. Regardless of the morality of this or any causality we may think is there the Fed’s policy includes targeting asset prices and the stock market is going up.
At the same time the fundamentals appear to me to stink. I’ve said many times that the stock market can go up at any time for no reason at all including against a backdrop of what appears to be lousy economic fundamentals. While there are of course positives here and there we need to understand that some portion of the recovery needs to be attributed to the desperate measures that our government has taken and will apparently continue to take in an attempt to revive the economy. Any recovery thus far has been far more sluggish than previous recoveries. Another throw in here is the muni market, that iShares Muni ETF with ticker MUB that we looked at a few weeks ago has been getting pounded.
All this makes for a confusing and abnormal situation. Whatever actions you take (or don’t take) are done against an abnormal backdrop. This is not something I would lose sight of. Earlier in the week I was reading an article at Seeking Alpha written by prominent gloom and doomer (prominent at SA, I’ve never heard of him otherwise). He has been making dire predictions every year using words like collapse and creating a general framework for the end being nigh. Interestingly the comments were very aggressive for how wrong he’s been in 2009 and 2010 (I did not look to see whether he was around in 2008 but if he was then he could have been thought of as being correct for that year.
I am not sure why every single datapoint must confirm the end of life as we know it or conversely we must take the optimistic spin on every datapoint. Every day of your life there has been a bull case for the market and a bear case and this will always be. In March 2009 the bull case turned out to be the SPX being 25% below its 200 DMA (one take on events). In 1998, so with many months of booming stock market remaining, valuations were starting to build the bear case.
A couple of commenters on the doom and gloom post noted that this guy, an investment manager of some sort, has missed an 88% rally for his clients. There is no way to know if portfolios match the blog posts but marrying a position in this manner is simply unnecessary and counter productive. I draw some pretty negative conclusions about the underlying economic fundamentals of the US and the malignancy of the desperate measures taken and I have been quite clear about that but if ever there was an instance in our investment careers where don’t fight the fed ruled the day, wouldn’t that be now?
The bear case could turn out to be 100% correct but not play out in doom and gloom for years or somehow, some way the bear case could turn out to be completely wrong (far from my base case but anyone can be wrong about anything). Opinions are one thing but positioning your portfolio for either complete annihilation of the free world or money perpetually falling from the sky are both huge bets that most of us should not be placing.