Money Managers Embrace New Bull Market

True values are best arrived at when the maximum number of buyers and sellers meet publicly to exchange their bid and ask prices. Stock exchanges are auction-like markets where buyers and sellers are matched. When investors are extremely pessimistic, they are historically underweight equities with excess cash. At these extremes the odds of an upside trend reversal increase since it requires accelerating negative future data for stocks to keep moving lower. Such was the situation last October when Active Managers had a paltry 13% portfolio allocation in stocks and the CNN Greed index was also a Fearful 13%. With everyone worried about recession and a future collapse in corporate earnings, it was a good time to Buy stocks. Today Active Managers have flipped to extreme optimism with a 93% equity allocation and the Greed Index pushing above 80%. Thus, even though large-cap Dow and small-cap Russell 2000 Index stocks are severely lagging, now is the time to become more defensive as Bullish Seasonality peaks between mid-July and mid-August.

The extreme pessimism in 2022 and Bear market in stocks were triggered by the Fed’s fight against inflation that erased the Covid Stimulus premium in equities. What caused the strong reversal in 2023 and increasing optimism?  Signs of falling inflation along with improving economic data have been the primary reasons for improved sentiment. Increasingly investors realize that excluding the lag effect of housing, inflation would already have achieved the Fed’s 2% target. Housing comprises 40% of core CPI. Alternative measures of rent reveal that the Fed has almost inflation goal and should now pause its hiking cycle. We have supported every rate hike by the Fed to date, but with “real” inflation now well below the 5 to 5.25% Federal Funds rate, monetary policy may now be tighter than required to create their goal of price stability.

Surging construction spending on apartments and factories adds to a labor shortage that supports the renewed optimism around corporate earnings and an economy less likely to enter the over forecasted deep recession. Overall construction has been growing at a strong s10% pace the past 7 months.

The massive COVID stimulus provided consumers with deep pockets and free money that reduced credit stress despite ever increasing consumption and borrowing. Debt burdens have risen in nominal terms, but borrowing capacity continues to be excellent. Until job growth turns into net job losses, it’s hard to see any red flags on the credit front.

Other key measures of consumer credit health are default and delinquency rates. While default rates on credit cards have risen to the high end of normal, delinquency rates overall remain near record lows.

The Government enhanced fear of COVID in 2020 and the inflation spike in 2021 and 2022 caused consumer confidence to plunge to record lows indicative of the deepest recession in history. However, the economy never collapsed, and confidence rebounded this year as it became clear that inflation would soon normalize without a severe downturn in the economy or company earning valuations.

Rising consumer confidence and falling inflation expectations have coincided with a rally in the general stock market. The 2023 Bull move in equities has been exaggerated by Nvidia’s news that the arms race for Artificial Intelligence (A.I.) has begun. We are a bit surprised that our maximum Summer potential for stocks that we outlined a few months ago is already being tested today, thanks to mega cap tech stocks that dominate the A.I. race. While the majority of historical data suggest that earnings will not falter and that 2nd half equity gains typically follow a strong 1st half, we still expect corrective stock market action as we move beyond the late July to early August seasonal topping window. Cash SP 4300’s is now the higher low that should provide good short-term support.








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