Strategists Say You're Overthinking Threats to the Bull Market

(Bloomberg) -- Growth is slowing. A trade war rages. The yield curve has inverted and earnings have hit a wall. Ingested together, the menu of investor irritants can overwhelm. But are they any worse than usual?

It’s a topic for psychologists as well as market theorists, whether errors of human cognition make the here-and-now always seem worse than it is. Sometimes called availability or recency biases, they have run amok during the bull market, which has so far defied every doom prophecy.

To Alex Bellefleur, chief economist and strategist at Mackenzie Financial Corp., investors sound a little too worried -- as usual. While fear is healthy and warnings are what Wall Street gets paid for, all the angst is just as likely to resolve itself in a “pain trade” in which people bail just as stocks advance.

“It’s almost a bad look for a market professional to ignore these signals. There’s responsibility to try and avoid bad things when you see them,” Bellefleur said. “But it seems that there are forces that can give the cycle the room to run.”

Jason DeSena Trennert, the chief investment strategist at Strategas Research Partners, made a list of things that, according to investors, could signal a looming slowdown, and says not only are they survivable, most of them aren’t actual threats yet. Trennert, who last year correctly predicted that the S&P would test its February lows before rebounding, says virtually every indicator framed as signaling doom is actually flashing “all clear.”

M&A Boom; IPO Activity

While appetite for deals and new issues has been on the rise this year, partly triggered by a rally in U.S. stocks, Strategas said IPO activity is hardly excessive. New issues have raised $35.9 billion, the most since at least 2009, and the value of announced deals in North America rose 8.6% in the first quarter compared with a year ago. Still, the value of M&A deals as a percentage of the S&P’s market cap remains below pre-crisis highs.

“While IPO activity has been rather lackluster this bull market, the current list of expected IPOs will be an important litmus test as to whether fear will ultimately give way to greed among retail investors,” Trennert said.

Rising Rates; Stalling Upward Earnings Revisions

Forecasts for S&P 500 profits peaked in September at $177 a share, just before the market fell to the brink of a bear market. They’ve been going down ever since and now stand at $166.50 a share, a 6% drop from September highs. Still, this year’s anticipated earnings growth -- 4.4% according to data compiled by Bloomberg -- is still a “safe” level, Trennert said.

Rising rates, a source of concern in months leading to previous recessions, aren’t a factor now. Treasury yields have plunged in recent weeks and the Federal Reserve has signaled it’s prepared to act if economic conditions worsen. The central bank will issue its latest policy decision Wednesday.

Thinning Breadth, Defensive Leadership

The last innings of a bull market in in 1999 and 2007 were characterized by fewer stocks propelling the broader market, but that’s not something to worry about now. Market breadth -- as measured in the percentage of stocks trading above their 200-day moving average -- is near the highest level since early May.

Defensive groups such as REITs and utilities have been among the leaders this year, but it doesn’t mean that cyclical sectors are falling behind. The spread in returns between economically sensitive and defensive stocks in the MSCI USA Index has climbed 9% since hitting its 15-month low in December.

Widening Spreads

For all the concern about the economy, the spread between junk-rated U.S. bonds and Treasuries hovers at 390 points, below its five-year average of 441 points, signaling that anticipation of corporate defaults is going down.

Steep Equity Gains, Heavy Inflows

Over the past 10 years, there’ve been moments when animal spirits ran high among stock investors, but for most of the bull market’s run, investors have acted as though they hated owning stocks again and every 5% drop was seen as the next recession.

With the S&P 500 Index within 1% of a record, investor exuberance is nowhere to be found. Hedge funds’ exposure to stocks dropped to 20%, data compiled by SentimenTrader show, the lowest level in five years. Investors haven’t been this pessimistic since the global financial crisis of 2008, according to the latest Bank of America Merrill Lynch survey of money managers with $528 billion between them.

“New highs may be elusive until there are clear signs that the current trade tensions with China are dissipating or that the Fed is ready to ease more than once under the specter of a trade war,” Trennert said.

Not all strategists agree. Morgan Stanley’s Michael Wilson and Cantor Fitzgerald LP’s Peter Cecchini, two of the most bearish on Wall Street, have been voicing concerns about the threat of a looming recession.

To contact the reporter on this story: Elena Popina in New York at epopina@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Chris Nagi, Jeremy Herron

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