Why I'm Still Bullish Despite Nervousness In The Market

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Nervousness is in vogue. It seems that every day another big name fund manager or investor goes public with worry about a correction in the stock market. Last night it was hedge fund manager David Tepper, who, speaking at the SALT conference in Las Vegas, cautioned attendees “Don’t be too freakin’ long!” Tepper has been an outspoken bull for a while, so his conversion to the ranks of the nervous is noteworthy.

Couple all of this public hand wringing with a market that keeps backing off of new highs and it is hard not to feel that the end is near. This week marks the third time in as many months that the S&P 500 has hit new highs, then been unable to follow through and has backed off immediately.

I too, at times feel this worry, but, when I step back and consider where we are, it seems that the reasons for the bull market of the last 5 years are still intact. In fact, you could even view several of the things that are causing Tepper and others to worry as just further positives.

To those of us that remember the “irrational exuberance” of the late 90s and the credit-fueled boom of 2007, the fact that the market is proceeding with some degree of caution rather than zooming up in a straight line is a healthy sign. Those experiences have programmed us to worry whenever things start to look good, but this is not a move based on the overvaluation of companies without profits, nor on excessively leveraged speculation.

Mr. Tepper did include leverage as one of his reasons for worry, but the latest data from the New York Stock Exchange actually shows margin debt declining in March of this year for the first time in 8 months. Of course, 8 months of increases support his case, but the fact that there is evidence, once again, of some caution suggests more a sustainable move than an out of control bubble.

Similarly, the concern that both Chinese and European monetary policy is too tight can be looked at two ways. Unlike here in the US or in Japan, for example, that means that both of these central banks have room to ease policy when they see fit. It could be that they are a little behind the curve and, as I have stated before, a deflationary scenario could spell disaster for the still heavily indebted peripheral European nations, but liquidity has supported the move to here and the prospect of more will offer support.

That liquidity continues. The Fed is tapering, but still buying assets and intends to keep rates low for the time being. The Japanese are still throwing money at their problems. The ECB, while being true to their history of more talk than action, seems to be seriously considering adding to the global flood of cash looking for a return.

All of this could have detrimental effects in years to come, but for now, look at it like a fund manager. The Dow Jones Industrial average is yielding around 2.2% at these levels compared to a 10 year Treasury yielding 2.5%. There is some risk involved in taking that 2.2%, but there are very few 10 year periods in the history of US stocks when investors lost money. Little wonder then that every correction so far in this bull run has been just that, a correction. It is interesting that, while advising caution, Mr. Tepper stopped short of a recommendation to short the market.

Support is also derived from the most basic fundamental, corporate profits. Given the much publicized weather problems in the first quarter of this year the fact that there were still a healthy percentage of earnings beats cannot be ignored. Like the markets, corporate America, it seems is climbing a wall of worry.

I understand the nervousness that people feel each time a new high is reached in stocks; after all, what goes up must surely come down, right? To some extent, yes, but the fundamental reasons for the market’s climb, a big pool of cash seeking a return and healthy corporate profits, are still with us. Until either of these things change, I remain a somewhat reluctant bull.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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