A couple of very wise investment strategists have turned quite bearish recently. As we noted on Monday, Stanley Druckenmiller, the legendary investor, had some sensible, though very pessimistic, things to say about the outlook for monetary policy and the stock market in a 5/4 speech at the Sohn Investment Conference.
“Three years ago on this stage I criticized the rationale of fed policy but drew a bullish intermediate conclusion as the weight of the evidence suggested the tidal wave of central bank money worldwide would still propel financial assets higher. I now feel the weight of the evidence has shifted the other way; higher valuations, three more years of unproductive corporate behavior, limits to further easing and excessive borrowing from the future suggest that the bull market is exhausting itself.” He ominously concluded: “While policymakers have no end game, markets do.”
In an appearance on BloombergTV on Monday, Savita Subramanian, Bank of America Merrill Lynch’s head of US equity & quantitative strategy, warned of a “vortex of negative headlines” coming in June that could soon push the S&P 500 to 1,850 — back near its February lows. Among the factors she cited are the upcoming “Brexit” vote, the June decision from the Federal Reserve, and the US election.
There seems to be a growing consensus that this might be a good year to go away in May. Arguably, that old adage worked last year when the S&P 500 peaked at a record high on May 21. However, the adage advised coming back into the stock market during November, just in time to get beat up in January. The market is basically flat over the past year with a dividend yield that’s in line with returns in the fixed-income market. As Joe and I noted on Tuesday, the S&P 500 soared 66.7% from June 1, 2012 through last year’s May 21 record high — without any significant correction along the way. Following the adage would have reduced that gain significantly.
The good news is that bearish sentiment is widespread, which has often been bullish from a contrarian’s perspective. As Debbie reviews below, the Bull/Bear Ratio compiled by Investors Intelligence dipped from 2.15 last week to 1.85 this week. The percentage of bulls dropped from 44.3% to 40.2%. However, most of the low-conviction bulls trotted over to the correction camp rather than the bear camp.
It’s been a tough bull market for the bears. Many of them have been predicting an imminent “endgame” for the bull market almost since it started. However, each time they seemed on the verge of getting it right, the central banks would spoil their fun by providing more easy money. Druckenmiller didn’t predict that the endgame was imminent, just that it’s coming--though he did say the bull seems exhausted and implied that central bankers have run out of ammo.
Maybe so, but yesterday we wrote about “Helicopter Money” as the last resort of the banks of last resort. In our version of “Apocalypse Now,” the central bankers will team up with politicians to implement what Ben Bernanke calls “Money-Financed Fiscal Programs” to avoid the endgame if necessary.
What about Brexit, a rate hike at the June meeting of the FOMC, and the nasty choice facing Americans in the presidential election? Brexit might not happen, and if it does, it might not have much impact on the US. A June rate hike also is not a sure thing. Stocks could move higher if the FOMC postpones the next rate hike again. The presidential election--now that could be ugly.
Dr. Ed Yardeni
is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.
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