Why Stocks are a “Harder Call” Now

Stocks seem to be facing more of a dichotomous near-term outlook than at any I time I can remember.

They’re always “hard to figure out” of course, even when we don’t think they are, but right now they seem even harder to figure out than usual, if that makes any sense. The bearish case is overvaluation and the bullish case is barely bullish – because of overvaluation (read a bunch of outlook pieces, even the guys who are positive on the markets are saying “Don’t expect another year like the last two!”).

But they’re willing to hang in there in case something really big, economically speaking, is in the works.

I frame this concept thusly:

A. We’re at the verge of a huge economic breakout after 13 years of zero real forward momentum, in which case stocks are reasonably priced and in a new secular bull market.


B. The cycle is about to come to an end with the Fed’s reduction of stimulus, the economy will continue to exhibit stagnation on its own and we’re in the process of forming a cyclical top in the equity markets as valuations and multiples have peaked out.

It genuinely feels as though we’re facing one of those two outcomes. It also feels as though the future isn’t written, that either one of these outcomes is still possible, we could go in either direction. Which means anyone can guess, but no one can actually know.

I suppose that’s why they call times like these “an inflection point.”

Here’s my friend Cardiff Garcia at FT Alphaville musing on this perplexing puzzle for stock investors:

One (partial and familiar) explanation for what happened in 2013 is simply that the behaviour of equity and fixed income markets was pulled forward in time by expectations of future monetary policy — which is how monetary policy is supposed to work.

That sounds about right. The Fed announced open-ended QE in September 2012, and it was just in December 2012 that it switched from a calendar-based to a state-contingent forward guidance. Maybe it just took a little while for the economy to catch up to the market’s expectations.

Unlike at the same time last year, it’s hard now to find an obvious metric showing that equities are undervalued. It’s also hard to find one showing that they’re significantly overvalued, unless you include the controversial CAPE. Equities can obviously still keep climbing for a long time, especially given their sustained attractiveness relative to bonds. It’s just a harder call.

I totally agree with Cardiff, it’s an extremely hard call. And while I remain constructive and positive, as I have been for years, I’m having trouble seeing how 2014 can be nearly as good as 2012 and 2013 were for investors.


Taking Stock (FT Alphaville)

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