We find ourselves in a very pessimistic environment these days: everyone hates the stock market and most forecasters issue tepid reports. Goldman Sachs issued a neutral rating on the stock market yesterday, and earlier this week bank of America Merrill Lynch did the same. Simply put, we think they are wrong and we expect a good year ahead.
Year to date, the yield on US 10-Year Treasuries has dropped more than 20%. Yet, we are in a rising rate environment, as the fed hiked rates last December, and they will hike again before another cut. The money should not be flowing into treasuries, yet year to date it is. We think this is due to the fear the three sharp 10% corrections over the last 12 months. Investors are afraid of another quick drop and are pricing in lower not higher markets - we think this is a mistake.
We absolutely acknowledge the uncertainty in the markets. The idea that yet again, year-over-year, Europe is facing another member state leaving is not as meaningful as markets would believe.
The UK is not a member of the common currency or Schengen area (open border system within Europe).
We hate to sound like a broken record, but we do not believe this event is a meaningful enough to warrant a market selloff. An exit from the UK is neither threatening a currency, nor political structure – in fact if any Euro member were to quit, it would not be much easier than arranging the UK’s exit.
We continue to think this market goes higher, and certainty provided by the US Federal reserve increasing rates will confirm a strong economy and further upside in the market.
We are in the early innings of a rate hike cycle.
The most recent move higher was in 2004-2006:
Here is a comparison between that rising interest rate cycle and the Financial Index:
We have a high allocation in financials to take advantage of this cycle, if we are right, we should have a good year.
One last piece of information...
Here is a comparison of the Annual returns on the S&P 500 in the last 1980 secular bull market and the 2012 secular bull market. After every negative year, we saw solid bounces the following year. We would not be surprised to see this happen again.
We are carrying a conservative amount of cash, but are looking more to buying than selling right now.
Happy to discuss if you have any questions.