Deutsche Bank AG last week warned investors the stock market is pricing at “extreme levels’ as investors drive the Dow to new highs once again. Up from the mid 17,000’S in 2016, the Dow now sits in the high 28,000 range and is not all that far from the major milestone of 30,000.
The multiples of ten thousand have only been reached twice before when the Dow surpassed 10,000 and then 20,000. Closing in on 30,000 is indeed a major milestone. Deutsche strategists Parag Thatte, Srineel Jalagani and Binky Chadha wrote January 10, 2020 “Equity positioning, like the market itself, has run far ahead of current growth, as investor’s price in a global rebound”. The market is “now in the 96th percentile on our consolidated measure, with a wide variety of metrics stretched”.
In plain English, Deutsche is saying prices are very high historically speaking, and a variety of measuring metrics are all above their averages to the upside. The only time Deutsche’s metrics have been stretched farther was in January of 2018, prior to a significant sell-off in the markets according to the Deutsche strategists.
They went on to note “investors are clearly overweight” at the highest levels since October 2018. October 1, 2018 brought the start of a severe correction lasting until December 24, 2018. It was the worst correction since the 2008/19 market crash and economic real estate implosion that preceded it which brought the world’s financial system to its knees.
The S&P 500 has already gained 1.2% since January 1, 2020 pushing new records almost daily. That followed an eye-popping 29% gain in 2019, it best performance since 2013. Despite geopolitical concerns and impeachment proceedings, the market seemingly is in an almost relentless upward trajectory.
Rumors of a soft patch caused minor gyrations in the market throughout 2019 yet the indexes eventually plowed ever higher.
Deutsche strategist Chadra had been the most bullish of top strategists tracked by Bloomberg and his prediction of an S&P at 3,265 compared to the actual level of 3,231 at the end of 2019 hit the mark almost exactly. Now Chadra is relatively bearish (negative on the markets) and is calling for an S&P level of 3,250. Not that the 3,250 level is catastrophic. Far from it. It sits about that level now. What he is saying is it won’t end up higher 12 months from now and instead end up approximately where it sits now. Kind of slow grind to nowhere.
Now that we’ve got your attention, here are some caveats to keep in mind when taking the Deutsche Bank observation to heart and selling out your portfolio. No one can predict market movements with 100% accuracy and history is rife with analysts who got it right the first time around and were completely wrong on subsequent calls.
Even the smartest quants (math geniuses) employed by the largest financial firms more often than not disagree on their prognostications and I could show you 100 articles that would have you convinced the Dow is going to 35,000 and another 100 more articles which would have you quivering in fear of a Dow 10,000. The opinions are that varied.
If you need reasons to doubt the Deutsche warning, there are many. Unemployment is at decade lows, disposable incomes are rising, the employment market is tighter than it’s been in years, many companies are reporting better than expected earnings, interest rates are historically in a very low range, the Federal Reserve is maintaining it accommodative monetary stance and 2020 is the fourth year in the election cycle. The fourth year is historically the second best year of the four years in the cycle (2021 will be year one of this four year cycle).
Lastly there are a few old sayings on Wall Street that may calm nervous investors. From the CEO of Citibank during the real estate boom of the 2000’s. “One day it will come to an end but as long as the music is playing, you have to keep dancing”.
That and “markets can stay illogical much longer than you can stay liquid” meaning just because the market has been rising by a huge amount, doesn’t mean it can’t keep going. Remember there have been those predicting this market would crash ever since it began its recent historic rise in late 2016 and throughout other market super-rallies.
The bottom line parallels another old saying “it’s not different this time”. Better said “it’s different every time”. This means there is no rule that says this market can’t keep running. At some point all markets go through corrections, some severe. But with many economic statistics being more positive than in decades, this market has many reasons it could just keep going. That said, having good diversification in one’s holdings, not going too far out on a “stock limb” and having some sort of exit strategy might be prudent in the face of this historic rise.
This article expresses the opinions of Marc Cuniberti and are opinions only and should not be construed or acted upon as individual investment advice. Mr. Cuniberti is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Marc can be contacted at SMC Wealth Management, 164 Maple St #1, Auburn, CA 95603 (530) 559-1214. SMC and Cambridge are not affiliated. His website is www.moneymanagementradio.com. California Insurance License # OL34249. No one can predict market movements at any time. Investing involves risk and you can lose money. Consult a qualified financial professional before making any investment decisions and do your own research before investing.