Is Now The Time To Be Bullish?
By Roger Nusbaum, AdvisorShares ETF Strategist
Last month Martin Pring wrote a commentary titled Six Reasons To Be Bullish. This post won’t go through trying to assess whether Pring is correct but will look at some behavioral ideas in his article because in addition to the insight he offers are some ways to think about things in a different fashion than how investors normally do.
For example, Pring discussed the extent to which the market is or isn’t over valued based on Shiller’s Cyclically Adjusted Price Earnings Ratio (CAPE). For most if not all of the bull market the CAPE has been relatively high compared to long term averages and while this has been part of the bear case, the market has continued to work, or at least grind, higher.
Pring makes a couple of different points about valuation. One is that a high CAPE is among other things an expression of confidence. Investors willing to buy high in expectation that the trend for higher prices can continue.
The other point he makes is more technical in nature which is that high valuation isn’t a problem unless the trend is lower. For now, Pring says, the trend is higher.
Pring also looks at credit spreads, he notes they are narrowing. At some credit spreads become too narrow and the market for high yield debt is thought to be overvalued, when spreads are too wide they are thought to be overvalued. In a similar argument with CAPE he notes that credit spreads getting narrower is a sign of confidence that serves as a favorable indicator.
There is a conversation about biases to be had here. Thinking back to the start of this bull market in 2009, based on sentiment and fundamentals there appeared to be no reason for the market to turn higher. During the bear market, before it as well, I wrote about how markets tend to turn from bear to bull which is that it just turns for no apparent reason.
Pring is taking what investors often perceive as being negative and thinking about them in a different way. Both CAPE and credit spreads have been perceived as reasons for the equity rally to run out of steam but that hasn’t really been the case, the bull market even overcame 15 months without a new high.
There is a related point here which is about over intellectualizing or over thinking the investment process. There is always a bear case for equities whether the market is at the top or the bottom but the market has had the tendency to go up far more often than it goes down. And if you can just stay close with an adequate savings rate you will probably come out where you need to in terms of financial plan success.
While I am a huge believer in trying to smooth out the ride, add a little yield as well as conquering the cognitive biases that prove to be such obstacles for people in coming out where they need to, anything else you do in your portfolio needs to be considered against that reality.
Tying back to Pring, the current bull market will end at some point, Pring may be correct that for now things look bullish or maybe he is wrong and it will end soon but the bull/bear market cycle has not been repealed and whenever the next bear market comes, the market will go down a lot, scare a lot of people, it will then end (probably for no apparent reason) and start a new bull. It seems simplistic to say that but a lot of people will forget when the time comes.