Experience taught me a few things. One is to listen to your gut, no matter how good something sounds on paper. The second is that you're generally better off sticking with what you know. And the third is that sometimes your best investments are the ones you don't make.
~ Donald Trump
Investing can be very confusing. At any given moment in time, you can find very smart people who will tell you that now is a great time to invest in stocks. These are the bulls. At the very same moment, you can find very smart people who will tell you that now is a terrible time to pile into stocks. These are the bears.
Today I'm going to present you with the opinions of two analysts with very different approaches to investing. I'm going to call one a bear and one a bull, although both would change their views if the indicators they follow were to change. Neither should be considered a blanket spokesperson for their respective cases. There are many people who are bullish or bearish for reasons that are different than those outlined here.
In This Corner, the Bulls
The bull corner for today will be populated by Leon Tuey, a veteran technical analyst whose Letter to the Bears was published by Jonathan Ratner of the Financial Post. I came across it courtesy of @JonChevreau on Twitter. This is a kind of Nelson Muntz (click for sound bite) swipe at anyone who's been bearish on the market since the rally started a year ago. Having said that, Mr. Tuey does make some valid points:
- Secular Bear Thesis is Not Holding Up: Mr. Tuey is under the impression that secular bear markets should trace lower lows. If that were the case, he would be right. However, most of the folks that I've read who have characterized this as a secular bear market (Danielle Park, John Mauldin, and many others) would not describe it that way. Instead, a secular bear market is a long cycle where the markets experience great volatility in both directions and end up virtually unchanged at the end of it all. This particular point of contention seems to be more an issue of definition rather than disagreement.
- V-Shaped Recovery Is No Surprise: Given the monetary and fiscal stimulus shoveled into the global financial system by governments and central banks worldwide, it's no surprise that the economy is doing much better. The bears will lament the consequences of this stimulus down the road, but right now, the markets are rising as a result of these efforts.
- The Stock Market Is a Leading Indicator: Bears who have been worried about the consumer because of high unemployment, low savings, and the collapse of the housing market are ignoring the phenomenal performance of the retailers and the IYR real estate ETF. These indices are telling us that things are going to get better.
- Corrections Are a Normal Part of All Bull Markets: Mr. Tuey seems to be arguing that the stock market, in the long term, is a bull market. The recent correction was no more than a normal readjustment in a market that had rallied long and strong for many years.
- Don't Fight the Tape: The trend is up. If you choose to trade against the trend, you do so at your peril. “To err is human, but to argue with the market is an exercise in masochism”.
In This Corner, the Bears
My bear du jour is Danielle Park, author of Juggling Dynamite, popular guest speaker, and money manager. She was bearish before the financial crisis hit, turned bullish around February of 2009, and now feels that the markets may have come too far too fast. Ms. Park recently did an interview with Stirling Faux of The Money and Wealth Show. Some of her thoughts are as follows:
- Wall St. vs. Main St.: The markets have risen dramatically over the past year, but on low volume. Many average investors felt duped by the markets after the financial crisis and have been reluctant to participate as a result. Ms. Park fears they will re-enter just as the music stops and get clobbered all over again.
- The Recent Pain Wasn't Long or Deep Enough: The good old boys on Wall Street that caused this crisis are back to their old tricks again, having reloaded their pockets with a fresh supply of capital from Main Street taxpayers. These guys were probably scared for about a week during the crisis, but continued happily on their way once it became apparent that the government would bail them out. (I made the case in Capitalism: The Missing Links that this is definitively not the way that capitalism is supposed to work.)
- Price Risk Is Now Extremely High: Valuations are stretched and this is not a great time to buy. Rather, investors should be using rallies as a chance to sell risk.
- Interest Rates Are Likely at an Inflection Point: Rates have been so low for so long that they are likely to rise at some point soon. Consumers and bond investors should plan accordingly. (Note: I have a guest post at Canadian Finance Blog today on Low Interest Rates: The Good, the Bad, and the Ugly.)
- Increasing Savings Is the Best Investment Strategy Right Now: If interest rates are set to rise, long-suffering savers will finally reap the rewards of their fiscal prudence.
My 2 Cents
If you've been reading Balance Junkie for a while, you can probably guess that I tend to agree more with Ms. Park. There are actually 4 parts to the interview on YouTube and I would encourage you to watch the whole thing. Mr. Tuey made some good points as well, and those who bought stocks anytime over the past year or so have been handsomely rewarded.
It comes down to your time horizon and risk tolerance. The key is to have a plan and stick to it. If your plan includes a high equity weighting, you need to make sure that you are willing to hold stocks through bull and bear cycles without getting scared into selling at the bottom or doubling down at the top.
If your risk tolerance is low, then you may want to lower your equity weighting as I think we're in for more choppy waters ahead. If your plan includes a minimal or zero weighting in equities, then you need to be OK with the fact that the market may in fact rally further from here without you.
I think Danielle Park offered the best advice I've heard from a money manager in a while:
- Take advantage of these low interest rates to pay off your debt.
- Build up your savings.
- Opportunities to buy at lower prices are coming, but they're not here at the moment.
That's my plan and I'm sticking to it.
Where do you stand on this bull-bear debate?