Consider the comments in the March 2009 New York Times column, in which I debated legendary (and then bearish investor) Robert Rodriguez at First Pacific Advisors (who embraced the negativity of the period). His concerns were illustrative of the bearish meme back then:
What optimists do not understand, says Mr. Rodriguez, chief executive of First Pacific Advisors, is that the United States is being profoundly reshaped by this recession.
"We've crossed over into a new financial era," he said. "You don't know what the ground rules are. You don't even know what the shape of the playing field is."
Economic growth may be stagnant for years, even after the economy hits bottom. Corporate profits may not bounce back. And the high hopes for recovery that have helped drive stocks higher this month may yet crumble.Stock markets rose 10 percent or more several times during the Depression, the early 1970s and other downturns, only to lose their momentum and give back months of gains. As bearish experts warn, market bottoms come only when investors give up hope of ever seeing a bottom. "This rally that's going on may prove ephemeral," Mr. Rodriguez said. "I still think we have a very long, arduous journey ahead of us...." "The stock market will be very volatile, and corporate profitability will be very volatile," Mr. Rodriguez said. "There are large segments of the United States economy that will never come back." -- Jack Healy, " A Pitched Battle for Turf Between the Bears and the Bulls," The New York Times (March 30, 2009)
The Bottom LineI continue to hold to the view that the S&P 500 is fairly valued at approximately 1650 (or about 10% below current levels) and that the expected range in the S&P for the balance of the year should be between 1700 and 1925. With the S&P now at 1850, the risk (150 S&P points) exceeds the reward (75 S&P points) by a factor of 2 to 1. While I expect equities to be down by 5% to 15% in 2014, I am uncertain as to the timing of a potential downturn. At best I view 2014 as a year of subpar returns. At worst, a cyclical bear could lie around the corner. For now I am positioned market-neutral, and I prefer being reactionary (rather than anticipatory), looking for Mr. Market's price action to give me some direction. The major market risks include a downgrade in valuations (and P/E ratios), disappointing corporate profits (and profit margins), less vigorous global economic growth (which might be the message of the recent flattening in the yield curve) and the likely emergence of natural price discovery in the capital markets as the Fed begins to taper and ultimately raise interest rates. The first quarter of 2014 is the first opening three-month period of a year since 2009 that the market has made no progress. Market leadership is changing, often a worrisome signal. Previously poorly performing large-cap conservative market sectors are strengthening just as the market leaders have slumped, which is reminiscent of the weakness in large-cap value in 1997-1999 and the firming up in early 2000 right before the market's schmeissing. The upcoming reporting period might prove to be a market catalyst to the downside. In terms of comparing the Marches (2009 and 2014), obviously generational bottoms occur only once a generation, but cyclical tops (and bottoms) are entirely other things -- they happen with frequency. I conclude that stocks, which with the benefit of hindsight were at the generational bottom five years ago, might very well be mapping out a cyclical top in early 2014. History doesn't repeat itself, but it sure as hell rhymes.
This column originally appeared on Real Money Pro at 9:13 a.m. EDT on March 31.
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