EC Still Climbing The Wall Of Worry

As the song goes "Don't Worry, Be Happy". Too long have we been mired in Calvinistic pessimism anticipating "the end of days". It is a bull market so be really bullish.

A year ago I was premature in my forecast of the DJIA reaching 30,000 by the end of 2018. It now looks as though this landmark could be reached either by the end of this year or in early 2020. As a career sell-side analyst, I was frequently criticized for being three months too early. Better to be too early than too late, thought I! Besides, the 2018 Christmas Eve Massacre was totally unwarranted as demonstrated by the rapid rebound. More worry, worry, worry!

Worry, to the point of irrational pessimism and sheer terror has been the hallmark of investors' collective attitudes during the entire post-Lehman decade. The worry seems to stem from a pervasive fear of history being about to repeat itself at every blip and burp on the economic landscape.

T Bond yield: Equity yield Ratio

The 30-year T bond yield: equity yield ratio has been a good indicator of when market participants were irrationally exuberant as in the summer of 1987 and the latter part of the 1990s, shown as the black line in the following chart. Since Lehman, the same players have been irrationally pessimistic.

The red line in the same chart is the actual price of the DJIA over the same period. Despite the heightened state of worry, the DJIA price has been moving up. Indeed whenever the ratio fell below 1 into the area denoted as sheer terror it was an excellent time to "buy and take no prisoners". With the ratio hovering close to 1 the DJIA is still very much a screaming buy as new record highs seem certain to be attained in the months and year ahead despite the pervasive gloom and the ridiculous claims, spuriously based on Newtonian physics, that "What goes up must come down".

As long as the ratio is below 2.33, I expect the DJIA price (the red line) to continue to rise. Right now, market participants are still irrationally pessimistic and very close to being in sheer terror of another financial meltdown.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Moon Kil Woong 4 months ago Contributor's comment

The strange issue of this is that both sides are right to a point. The bulls are right to ride the trend until it ends. Not doing so has been making people miss out on the fun. The bears are right that when it does come to an end it is liable to be ugly due primarily to the terrible actions of the Federal Reserve to pump up a bull at the cost of measures which are traditionally used to support the market during a downturn.

Yes the market looks tasty, but beware at the same time. There are a lot of warning signs which bolsters the bulls but if they tip over could well be a hallmark of a ugly bear. 2020 will be likely harder to call than other years as the election cycle adds even more volatility.

Tony Hayes CFA 4 months ago Author's comment

Dear Mr Moon

Nice to hear from you again. It seems that you are still as cautious as you were in April 2016 when you wrote:

"... stocks will be rocked by a downturn caused by the Fed's low rate policy that has created an even greater asset boom than Greenspan. Sadly, this spike has made it that much more impossible for the Fed to correct the downturn when it hits. Rather than learning its lesson it seems to be actively trying to recreate the last downturn and Yellen seems to be fashioning another great depression rather than trying to take measures to prevent one".

On April 15, 2016, the DJIA price stood at 17,926 while its dividend discount value was 40.607. Both the value and the price have risen since then to 66.192 and 28,130 respectively.

Is there anything that I can say that will help you out of your gloom?

Kind regards


Moon Kil Woong 3 months ago Contributor's comment

I urge caution and an awareness of the downside but if you read my posts I also make it a point to stay invested for the long term and buy companies that are cash flow positive and have low debt ratios in general but still grow and have a decent price. Thus I'm not your average bear and those that accuse me of being bullish on some stocks I'm not your average bull either.

Bill Myers 4 months ago Member's comment

Nicely put.

Backyard Hiker 4 months ago Member's comment

It is not the destination but the journey... and this market ride looks tasty indeed. Even if the end may turn ugly.