Yahoo Finance, as they are apt to do, ran an article with a hyperbolic headliner which bluntly opined, "We are about to enter the greatest bull market in 85 years." I'm glad that there is so much optimism in the face of virtually untenable challenges that the mainstream media deliberately glosses over, but at a certain point, conjecture, no matter how articulated it may be, cannot sustain an economy whose large cap equity sector accounts for 50% of global market capitalization, according to sources from CNBC.
This is why it's so refreshing that Ari Wald, head of technical analysis at Oppenheimer & Company, divulged specific details that support the aforementioned sentiment. While Mr. Wald does not discount the possibility of near-term weakness or volatility, he provided five reasons why investors should remain bullish for the long-term :
1. A secular breakout above its 2000 to 2013 price range.
2. An accommodative Federal Reserve policy.
3. Attractive stock valuations compared to bonds.
4. Cyclical sectors have stronger trends than defensive sectors.
5. Continued growth in the U.S. economy.
In reference to his first point, Mr. Wald states "When you consider that we're just getting above levels from 13 years ago, we think this is a much stronger structure that makes the case for higher highs and higher lows over the coming years." The verbiage relates to the discipline of technical analysis, which in this case is a speculative psychological assumption that as new highs are achieved in the markets, this naturally leads to the investment masses gaining confidence and continuing to push the markets higher still.
The problem with this assumption is that it's an assumption : there's no rule that higher highs must be accompanied by further momentum. If that was the case, we would never have a bear market and...let's cut the crap...we patently know that this isn't true! But more importantly, the context is very misleading. Yes, the market has had a "secular" breakout above its 2000 to 2013 range, but over the course of a decade-plus, it has merely regained losses from two market collapses, at least from a nominal perspective. There is also the contention that the recovery is not equitable as it correlates to the real losses incurred by the retail community, but that's a different story for a different day. The key issue is that the mainstream is patting itself for a recuperation : the real story is just beginning.
Points two, three and four, while presently legitimate, are not assured to be floors for the stock market should a negative catalyst wreak unexpected havoc on economic fundamentals. The accommodative Federal Reserve, to put it simply at the risk of sounding obtuse, is not guaranteed to continue their "generosity." Former Fed chair Ben Bernanke outlined an exit for the central bank to peel back its highly experimental quantitative easing program and even if current chair Janet Yellen were forced to unleash the monetary spigot in response to another financial crisis, there's no assurance that an identical policy will react in the same manner and scope in a future, dissimilar paradigm.
Because quantitative easing was directly tied to the bond market, any change in trajectory or even the mere velocity of current Fed policy will likely have unintended, and more to the point, unfavorable consequences for bond market valuations. We've already seen some wild fluctuations whenever serious deliberations occur inside the Fed so point number three is very much contentious. Point four, while true for now, is subject to a radical rotation should volatility enter either economic fundamentals or the bond market. At times of uncertainty, and this situation is very much uncertain, defensive sectors can take the form of a bear trap, springing violently upward at the first sign of real trouble.
Finally, we come to point number five. I think this is the most contentious argument because the growth, even though it is recorded as such by government statisticians, is accompanied by compositional problems within the labor market (swapping good jobs for menial ones) as well as rising standard of living costs, ironically also recorded by the Bureau of Labor Statistics. Ultimately, for the stock market to continue on its journey, a more widespread support basis must be established. Sadly, it is not there and those that take Mr. Wald's advice are setting themselves up for unnecessary risk.