Although I see no serious market weakness in my indicators (outside of being overbought in the short-term), it's always a good idea to consider a countervailing point of view...It is supplied below by David Driscoll of Liberty International...
MARKET
OUTLOOK
The S&P ended up with a total return of 31 per cent in
2019. This was the second-best year for the market since 1997 and similar to
market returns in 2013 (up 29 per cent). Unlike in 2013, however, profits in
2019 dropped; all the market upside came from multiple expansion.
In 1998, the U.S. Federal Reserve delivered 75 basis points
of “insurance cuts” and the S&P 500 rallied by 27 per cent and valuations
exploded like in 2019. Price multiples expanded from 18 times earnings to 23
times and accounted for nearly all the index return. Back then, Russia
Treasury yields fell from 5.8 to 4.7 per cent and, as a
result, technology stocks rallied (up 77 per cent) and accounted for 35 per
cent of the index return. As a result, the FOMO (fear of missing out) trades
are back in vogue, as are momentum traders. This explains the rapid rise and
fall of Tesla shares in just five weeks.
FOMO is also happening in the bond market, as junk bond
yields (non-investment grade bonds rated “BB” or worse) hover under 3 per cent.
To provide some comparison, they yielded 16 per cent during the Financial
Crisis. Clearly, the risks on these securities far outweigh the rewards.
Investors would be well advised to hold some cash in reserve
if this market runs out of energy and begins to topple. Our current holding of
cash is 20 per cent times the equity weighting. For clients who are 100 per
cent equities, they are 80 per cent invested and are holding 20 per cent cash.
For clients with a 60/40 stock and fixed income asset mix, the holdings are 12
per cent cash, 48 per cent equities and 40 per cent fixed income.
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