Technically Speaking: Will The Next Decade Be As Good As The Last?

In this past weekend’s newsletter we stated:

“This short-term oversold condition, and holding of minor support, does set the market up for a bounce next week which could get the market back above the 200-dma. The challenge, at least in the short-term remains the resistance level building at 2800.

That bounce occurred on Monday which allowed us to add some trading positions to our portfolios. 

Our job as portfolio managers is simple:

  1. Protect investment capital, and; (Long-term view)
  2. Take advantage of opportunity when it presents itself. (Short-term view)

The blending of the short and long-term views is the difficult part for readers to understand.

“If you have a long-term bearish view on future market returns, how can you be increasing equity exposure?”

Because, as rule #2 states, our job is to make money when we can while avoiding the long-term risk of capital destruction. As such, we must marry the long-term views with short-term opportunities which don’t necessarily always align.

For example, the media was full of commentary over the weekend discussing the market’s 10th anniversary.

“The U.S. bull market turned 10-years old Saturday, underscoring the resilience of a rally that has persisted despite tepid global growth, anxieties about central bank policies, and mounting trade tensions.” – WSJ

Yes, March 9th marked the 10-year mark of a bull market that started on that same day in 2009. Although there have been a few bumps along the way, the long-term bullish trend has remained intact.

“So, why can’t it just continue for another 10-years?”

It’s an important question and investors should review the catalysts of the last decade.

In 2009, valuations had reverted to the long-term average, asset prices got extremely oversold, and investor sentiment was extremely negative. These are all the ingredients necessary for a cyclical bull market which David Rosenberg detailed on Monday:

“Yes, this was indeed the third strong run-up in the S&P 500 on record with a total return increase of 400%. But in inflation-adjusted dollars, the $30 trillion expansion was a record, taking out the $25 trillion surge in real terms from December 1987 to March 2000.

As David details, the supports for the ensuing rally were abnormal in many aspects.

  • The government bailed out insolvent banks.
  • There were two massive fiscal stimulus programs separated by 8-years.
  • The Fed funds rate was ZERO for eight years, and repeated intervention into the marketplace boosted the Fed’s assets six-fold. How could asset values not be influenced by the central bank taking $4.5 trillion of ‘safe’ securities out of the public market?
  • Because there were no investable opportunities, cloud computing and AI aside, there was no capital deepening cycle. Cash flows (from tax relief too) were diverted to stock buybacks and dividend payments. The share count of the S&P 500 hit two-decade lows alongside two crazes – buybacks and M&A.
  • The Fed’s policies ignited the mother of all leverage cycles in the corporate sector. And it’s not all just about BBB-rated bonds. It’s about private equity, which experienced a massive credit bubble this cycle as well.
  • The WSJ mentions ‘anxieties’ about central banks even though they have been the best friend to the investing class than they have ever been in modern history.
  • The article also posited that the 10-year bull run confronted “mounting trade tensions.” Well, in truth, by the time these tensions began, in early 2018, over 90% of the bull markets was behind us.
  • What sort of market has but 4-companies accounting for 9% of the total return of this 10-year cycle; and 20 of the S&P 500 representing 30% of the total return gain? Answer- a highly concentrated one.
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