Wednesday, March 8, 2017

Happy Anniversary: Dancing With the Bulls

Anniversaries are usually joyous events. This week marked the eighth anniversary of the bull market. On March 3, 2009, President Barack Obama told us to buy stocks: “What you’re now seeing is profit-and-earning ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it.” On March 6, 2009, the S&P 500 fell to an intra-day low of 666, and never looked back. You might recall (because I’ve reminded you a few times since then) that soon after, I declared that this devilish number was THE low. March 9, 2009 marked the closing low of 676.53. Let’s review some of the accomplishments of the charging bull:

(1) Performance, earnings, and valuation. The S&P 500 is up 249% since March 9, 2009 through yesterday’s close. The forward earnings of the S&P 500 is up 103%. The forward P/E is up 75% (from 10.2 to 17.9).

(2) Blue Angels. Putting all these trends together in our Blue Angels charts shows that the market is certainly flying high. Valuations suggest that stock prices are too high. However, forward earnings for the S&P 500 continues to climb in record-high territory. Furthermore, valuation isn’t too high if President Donald Trump delivers the goodies that he promised, including tax cuts, deregulation, and infrastructure spending. The market clearly liked Trump’s speech before Congress last week, along with his kinder and gentler tone. It was his first truly presidential-sounding performance since he first landed on the political stage.

(3) Fundamentals. Last week’s rally was impressive, and certainly provided a vote of confidence in the President’s economic agenda. That vote was also merited by last Wednesday’s M-PMI, which jumped to 57.7 during February, up from 56.0 during January and 52.0 during October, before the presidential election. Yesterday’s ADP report showing a gain of nearly 300,000 in February payrolls is yet another number suggesting that Trump’s victory unleashed the economy’s animal spirits.

(4) Sentiment. The Bull-Bear Ratio compiled by Investors Intelligence rose to 3.82 last week. That’s the highest since April 2015. Of course, if we all start celebrating the stock market melt-up, the contrarian killjoys will say that such events are usually followed by a meltdown. They’ll observe that the hard work is still ahead, i.e., getting the bullish part of the Trump agenda passed by Congress while blocking the bearish parts that have to do with protectionism.

For now, I continue to dance with the bulls. On a note of caution, let’s recall the infamous last words of former Citi CEO Charles (“Chuck”) Prince. In July 2007, Prince told the FT that global liquidity was enormous and only a significant disruptive event could create difficulty in the leveraged buyout market. “As long as the music is playing, you’ve got to get up and dance. We’re still dancing,” he said. On November 4, 2007, he retired from both his chairman and chief executive positions due to unexpectedly poor Q3 results, mainly attributed to CDO- and MBS-related losses.

No comments: