If It’s Obvious, It’s Obviously…

By now, everybody knows the bull argument. In short, stocks are discounting better days ahead for the economy and earnings, less regulation, a “fantastic” stimulus package, and of course, “massive” tax reform. But as I’ve opined a time or two, the key here is that these expectations must at some point turn into reality. I.E. the hoped-for outcome must manifest in the form of corporate earnings that are better than the already elevated expectations.

And what happens if this economic reality is delayed, interrupted, or worse? By now, everybody probably knows the answer to this question as well. “Nothing good,” the bears tell us.

Speaking of our furry friends, by now, everybody also knows that the bear argument is worth considering at this point in the game.

Everybody knows that the trend in the stock market has morphed into a joyride to the upside and that the current rate of advance is unsustainable.

Everybody knows that the stock market has become overbought from a short-, intermediate-, and long-term perspective. In English, this means that stock prices may have run too far, too fast.

Everybody knows that investor sentiment has become overly optimistic and that such degrees of exuberance will, more often than not, lead to meaningful declines in stock prices.

Everybody knows that stock market valuations are, well, stretched, to say the least. Traditional valuation metrics are currently in rarified air – I.E. levels seen only during times such as 1987, 2000, and 2008. And even the relative valuation measures (indicators that include the level of interest rates) are no longer positive – and heading in the wrong direction.

Everybody knows that the Fed is going to raise interest rates a handful of times in 2017 and is likely to start down the hiking trail in March.

Everybody knows that inflation is starting to perk up and that if left unchecked, the Fed may need to begin an antagonistic campaign to rein prices in.

And, of course, everybody remembers what happened in 2000-02 and 2008.

In case it isn’t obvious, my point on this fine Tuesday morning is that everybody knows stocks are due for a pullback, a correction, or a even a bear market – it’s obvious right?

However, there are a couple famous Wall Street-isms that may apply here. The first of which is, “Something everybody knows, isn’t worth knowing.

The key here is to understand that Ms. Market has a way of making the crowd look foolish whenever she gets the chance.

The second comes from Joe (I’m the Greatest) Granville, who famously said, “If it’s obvious, it’s obviously wrong.”

In other words, the stock market is not an easy game and the next move is rarely, if ever, obvious. In addition, “everybody” doesn’t get it right very often. If they did, “everybody” would be rich!

So, I’ll leave you with this. Yes, stocks are overbought and there is no denying that sentiment has become a bit too optimistic or that valuations are high. And history shows that the current rate of ascent in the market isn’t likely to last.

But, to assume that stocks “must” go down – right here, right now – is foolish. As long as the base-level assumptions that are driving this rally remain intact, then the dip buyers are likely to remain active and as such, the much-anticipated pullback is likely to be a run-of-the-mill affair.

This is not to say that stocks won’t experience some scary days in the coming weeks. But again, unless something derails the bull train, it is probably a good idea to stay onboard for now.