The Present’s So Bright I Gotta Wear Shades

 

Is this as good as it gets for stocks?

That’s what the Financial Times’ estimable markets columnist John Authers asked Friday, and he cites some key data on why this may be the best of all possible worlds:

  • The Sharpe ratio, a widely followed measure of risk-adjusted return, has been 4.5 over the last 12 months, better than all but 99.7% of the time since 1900.
  • Cash balances in mutual funds and money-market fund assets as a percentage of equity funds are at all-time lows, suggesting there’s little cash on the sidelines.
  • The misery index (unemployment rate plus inflation) is at an all-time low.
  • In the nearly 12 months since the election, the Dow Jones Industrial Average has soared 31%, the Standard & Poor’s 500 index has rallied 23%, and the Nasdaq Composite index has skyrocketed 32%, powered by many of the FAANG stocks.

So, why am I skeptical?

First of all, I’m skeptical, not bearish. Our GoldenEgg Investing® investing plans are invested conservatively, but still have 40-50%, sometimes more, in equities. That’s because as John Maynard Keynes once said, “The market can stay irrational longer than you can stay solvent.”

As long as you have a decent position in stocks, you can still profit from everyone else’s irrationality while not going “all in” at just the wrong time.

But as a contrarian, I hear the alarm bells ringing. The euphoria is more subtle than it was in 1999, but it still feels like euphoria to me.

Also, as I’ve written in MarketWatch, during the first seven and a half years of this bull market while Barack Obama was president, many conservatives and Republicans avoided stocks because they thought the market’s gains were artificial, driven by debt and the Federal Reserve’s loose monetary policy. Now, under Republican President Donald Trump, they’re piling in. This looks like just another form of late-bull-market capitulation to me.

The fundamentals look good. Earnings are fine and though the Fed may be pulling in its horns a bit, the European Central Bank and the Bank of Japan have the printing presses running. The GOP Congressional leadership is desperate to get tax reform passed, and though I think it’s likely we’ll see tax cuts rather than true reform, that will be a plus for business and stocks.

But the risks are real and rising, particularly of war with North Korea, which could be catastrophic if not cataclysmic. And if Congress passes tax cuts, I think we’ll see a lot of selling on the news. So, this may be as good as it gets, but nothing lasts forever, and times like these are exactly when you should be preparing for the lean years.

 

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