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ATAC Week in Review: Big, Fat, Ugly Bubble

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From the Blog:
There can be no standardized path to excellence in a field that is so heavily dictated by chance. Whether you believe the markets are perfectly efficient and follow a purely random walk or not (I do not), we know that luck trumps skill in investment outcomes. Let me say that one more time: luck trumps skill in investment outcomes. READ MORE
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“We are in a big, fat, ugly bubble.” – Donald J. Trump

If Trump is right, the election just made it worse.

Of course, I’m certain that if Trump were asked what he thought of the market now, he’d be singing a different tune. Since Trump won the presidency, small-cap stocks and cyclical sectors have been on an absolute tear.  We went from investors fearing a Trump Crash to a Trump Melt-Up.  The narrative changes as price changes. Always remember that the reasons for why markets go up or down change based on whether markets are up or down.  The futility of predicting the long-term is somehow always forgotten.

Are we in a bubble? I have no idea.  No one does.  A bubble to me is best defined as an irrational belief held by the vast majority of participants which reaches a fever pitch.  I think by that standard, there probably is a bubble forming in the overriding belief that everything Trump attempts to accomplish will be uniformly positive and bullish.  The market seems to always get secondary and tertiary effects wrong.  Unintended consequences are a part of everything in life, particularly so in large complex systems.  To think with such euphoria that the next four years will be an economic boom because we have a businessman in the oval office disregards the fact that the future is never quite what we imagined.  It is only hindsight bias and narrative which makes us think that it always was.

Momentum in the moment is always nice to participate in, but not getting caught up in it is the key to tactical portfolio management.  In the near-term, it looks like market movement could continue higher given that yield sensitive areas continue to underperform.  Generally (with the exception of the last few years), yield parts of the investable landscape tend to outperform anticipating a period of higher volatility instead.  Thus far, given that credit spreads remain tight despite the yield move higher, there are no near-term signs of stress. That doesn’t mean necessarily that stocks won’t close the year out lower than they are now.  It just means the odds favor continuation in trend.

This has been a wild year.  We went from the worst start for stocks in history (remember that??) to a pretty damn good year.  From Treasuries posting huge gains, to giving it all back.  And all the while, the reasons for why these moves happen seem like they were destined to.  We are all story tellers when it comes to tomorrow, but we often forget that the story is only written after the fact.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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