This Sure Doesn't LOOK Like A New Bull Market

I have previously written that I am not particularly bullish or bearish on stocks right now, and believe that investors should have a normal or benchmark weight to the equity markets. 

There is no doubt that some news is improving.  Monetary policy has caused volatility to decrease exactly as history would have suggested, initial jobless claims (the indicator that I feel should be investors’ #1 economic indicator) is starting to improve regardless of the much-noted difficult seasonal adjustments, and the leading indicators of corporate profits growth appear to be bottoming.  In addition, fiscal policy stimulus is still working its way through the various government procurement systems and is likely to boost economic growth.

On the other hand, there is still quite a bit of incremental bad news: Goldman Sach’s recent earnings and compensation announcements are likely, in my opinion, to incite Washington to further regulate the financial sector, emerging market valuations are again (and perhaps too quickly) approaching extremes, credit growth remains subdued, and rising commodity prices are acting as a “tax increase” on the consumer and, therefore, are ultimately acting to stimulate deflation rather than inflation..

No one seems the least bit aware that leadership always changes during bear markets, but it hasn’t changed during the recent market upturn.  Either this cycle is going to be extremely unique and break a solid historical pattern, or this isn’t the bull market that many believe.  I find it particularly disconcerting that no one is discussing this historical fact, and are assuming that the prior cycle’s leadership should be the new leadership.

Rising volatility and bear markets are caused by changes in the economic environment.  The economic backdrop changes and the old leadership, which was suited for the prior economic environment, begins to underperform.  Volatility accordingly increases.  A new market leadership begins to emerge that is better suited for the forthcoming economic environment.

A dramatic example of this typical change in leadership occurred subsequent to the peak of the Technology bubble.  As the Tech bubble deflated, the old leadership (technology/media/telecom stocks) was replaced by new leadership which was better suited for the soon to emerge easy-credit environment.  It remains perplexing that many investors still don’t appreciate that credit was the common thread among the global growth stories of the past 5-7 years.  Commodities, housing, small stocks, emerging markets, hedge funds, private equity, short US dollar, etc. are all extremely credit-sensitive investments.

It concerns me that market rallies are being led by the prior cycle’s leadership (financials, energy).  This doesn’t make a lot of sense if the global economy is heading into a period of more sober credit and lending, yet market observers seem to be ignoring this critical point.

If the global economy is indeed returning to a credit-driven period, then of course one should overweight emerging markets, commodities, hedge funds, private equity, and sell short the US dollar.  I’m sceptical that such cheap and available credit lies ahead, and suggest that investors sell the present credit-related market leadership into strength.

Richard Bernstein is CEO of Richard Bernstein Capital Management LLC.  He was previously Merrill Lynch’s Chief Investment Strategist and Head of the Investment Strategy Group.  He has written two books on investing: Navigate The Noise: Investing In The New Age Of Media And Hype and Style Investing: Unique Insight Into Equity Management.

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