Today, in the midst of the worst recession during the post-WWII period, and after a particularly horrific bear market where the S&P 500 dropped 58%, there are many compelling arguments for why the financial markets are on the precipice of a breakdown to new lows. It’s hard to dispute that the long term prognosis for the U.S. economy appears challenging due to a number of headwinds that exist, such as large debt levels that are now deflating, a savings rate that is just starting to rise (implying less consumption spending going forward), a government fist that is tightening and seeks more regulation, and the strong probability of higher taxes and inflation down the road due to the desperate measures that fiscal and monetary authorities have implemented in order to “save the system.”
While all of the aforementioned problems are real and will change the way our economy works, I think the mistake that ultra bearish investors are making right now is that they are applying problems that will occur over years and decades (“secular”) to an asset allocation that needs to be positioned for months and years (“cyclical”). Yes, this period has brought about structural change to the global financial system, and yes, it’s hard to believe that the world will return to growth rates that were partially built on a Ponzi scheme and lots of leverage. But don’t overlook the fact that credit conditions are improving, housing affordability is way up, the frantic efforts of policymakers are aimed at jump starting the consumer, and the world economy is dynamic and finds ways to adjust. Lastly, don’t forget that all of the above should now be discounted and shouldn’t catch investors by surprise. Yes, the bears are retorting that the so-called “green shoots” we keep hearing about are about to turn into dandelions, and that this bear is not done roaring yet. But the bulls know that bull markets climb a "wall of worry," and the current wall is as high as it’s been in decades. They might warn the bears not to mistake the secular for the cyclical.
The bulls believe the market is climbing a wall of worry:
Chart source: Jim Stack, InvesTech Research
