E EC HH Bull Markets Climb A Wall Of Worry

Bull markets climb a wall of worryBull markets end when no one is any longer worried about anything.

Bear markets then decline as more and more investors throw in the towel.  Bear markets end when most investors swear off investing in the market.

Why this reminder?  One of our clients wrote last month and asked if I believed we should be in the market at all.  Consider, after all: Europe is in shambles.  China is decelerating.  Oil, gas and most essential commodities are down, down, down and face a glut as there is more supply than demand for almost all of them right now.  4th-quarter earnings of US companies are only so-so.  Expectations have been lowered hugely for 2015 future earnings.  Our president speaks of helping the middle class, yet his policies have harmed working families the most.  We’ve never reached such heights in the market. Mark Hulbert, who monitors and reports on a subset of financial writers, began a recent article, “The U.S. stock market’s major trend now is down, so act accordingly.”  This bull is older than almost every bull market in history.  Etc.  Etc.

All true.  All worrisome.  But bull markets climb a wall of worry.  It’s possible, of course, that this particular one will end with a failure to break out and without the usual euphoria that typically accompanies the end of a bull.  Or maybe it ended in December, with that euphoria, and now it is merely gasping for air.  (Mr. Hulbert’s piece, citing 2 of 3 adherents of Dow Theory, seems to suggest this as a distinct possibility.)  If this is the case, we’ll add to our defensive positions — but I don’t believe it is.  Here is what I see in the coming year in both the markets and the economy...

While our firm practices asset allocation for about 85% of our, and our clients’, portfolios, we are not dogmatic about it.  If there is an obvious opportunity like, say, buying the biggest and best oil companies with a view to long-term recovery, we will slightly change our reallocation matrix to over-weight this or that sector or asset class.  We do this knowing we may sacrifice small gains in the short term for significantly larger gains in the future.  We live in the present and plan to live even better in the future, so that’s the way we invest.  With that in mind, here’s our take on…

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Disclosure: The author is long ACWDX, AKREX, DRESX, HDPSX, SCHH, DBEF, DTN, ROOF, DFE, SCHG, VONE. The author wrote this article themselves, and it expresses their own opinions. The ...

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Kate Hayden 6 years ago Contributor's comment

This is the first explanation I've seen of the market craziness vis a vis the economy that makes sense to me, thanks! One question: With reference to your discussion of commodities, what do you suggest for those of us with investments in food stocks, or the stocks you mention (KO)?

Joseph Shaefer 6 years ago Author's comment

Hi, Ms. Hayden. When I talk about commodities, I mean the actual futures market. That's where I think those of us not "in the business" are babes in the woods and the woods are filled with very capable beasts!

The food STOCKS, however, are often wonderful investments for individuals. KO is a great example. It has long held a franchise on a sugary concoction that people either enjoy as a small pleasure, a guilty pleasure or as the bane of dentists everywhere! When it hits rough spots, as it did recently, many take the stock's decline as an opportunity to buy what is considered a defensive consumer discretionary company. Another example we like is Tyson Foods (TSN,) the huge chicken, beef and pork company.

My only caveat with any "defensive" stock is that, in a serious decline, there is no such thing. When the market goes into bear mode, no stock is immune!

Marcy Brown 6 years ago Member's comment

Do you think the stock or bond funds you mention are a reasonable choice for an individual retail investor? Or do they only make sense in quantity?

Joseph Shaefer 6 years ago Author's comment

I believe they are eminently reasonable choices for an individual investor. All have sufficient liquidity to ensure that individuals can buy or sell without fear of increasing the bid/ask spread and all are diversified enough in their holdings so a difficult time for any one position won't severely impact the rest of the portfolio. Our clients are all individual investors or small family foundations and I find these holdings appropriate for them.