Get Premium to unlock powerful stock data

Bull Markets Climb A Wall Of Worry -- So Where Are We Now?

Author's Avatar
Feb 20, 2015
Article's Main Image


  • Bull markets climb a wall of worry.
  • Bull markets end when no one is any longer worried about anything.
  • There plenty to worry about right now.
  • Does that mean we should expect a good market going forward?


Bull markets climb a wall of worry.

Bull markets end when no one is any longer worried about anything.

Bear markets then decline as more and more investors throw in the towel.

Bear markets end when most investors swear off investing in the market.

Why this reminder? One of our clients wrote last month and asked if I believed we should be in the market at all. Consider, after all: Europe is in shambles. China is decelerating. Oil, gas and most essential commodities are down, down, down and face a glut as there is more supply than demand for almost all of them right now. 4th-quarter earnings of US companies are only so-so.

Expectations have been lowered hugely for 2015 future earnings. Our president speaks of helping the middle class, yet his policies have harmed working families the most. We've never reached such heights in the market. Mark Hulbert, who monitors and reports on a subset of financial writers, began a recent article, "The U.S. stock market's major trend now is down, so act accordingly." This bull is older than almost every bull market in history. Etc. Etc.

All true. All worrisome. But bull markets climb a wall of worry. It's possible, of course, that this particular one will end with a failure to break out and without the usual euphoria that typically accompanies the end of a bull. Or maybe it ended in December, with that euphoria, and now it is merely gasping for air. (Mr. Hulbert's piece, citing 2 of 3 adherents of Dow Theory, seems to suggest this as a distinct possibility.) If this is the case, we'll add to our defensive positions - but I don't believe it is. Here is what I see in the coming year in both the markets and the economy...

While our firm practices asset allocation for about 85% of our, and our clients', portfolios, we are not dogmatic about it. If there is an obvious opportunity like, say, buying the biggest and best oil companies with a view to long-term recovery, we will slightly change our reallocation matrix to over-weight this or that sector or asset class. We do this knowing we may sacrifice small gains in the short term for significantly larger gains in the future. We live in the present and plan to live even better in the future, so that's the way we invest. With that in mind, here's our take on…

U.S. Stocks

I don't believe this will be as great a year as "most" years ending in "5" (which has nothing to do with numerology and much to do with the U.S. federal election cycle.) But I still expect to see a single-digit gain (5%? 7%?) this year. Once we hit the summer doldrums, we might or might not hang onto those gains.

Still, as I survey the other possibilities (CDs and bonds providing negative returns after taxes and inflation, emerging markets stung by the strong dollar, commodities slumping from low demand, etc.) I think companies selling products and services to U.S. consumers - think small- and mid-cap domestic firms - are the best bet on the immediate horizon. Some of our favorite funds in this area are Aston / LMCG Small Cap Growth N (ACWDX,) Guggenheim Spin-Off (CSD), Akre Focus (AKREX) and TrimTabs Float Shrink (TTFS.)

Can We Make Money in Bonds?

Sure we can. As long as central bankers are rushing to duplicate the success the USA has begun to enjoy as a result of slashing interest rates to the point where "who wouldn't" take a 30-year fixed mortgage at 3.75% or an auto loan at 0%. We'll always keep "some" amount of our allocation in US bonds, not for their returns but for their shelter from the storm.

But this year I think we can see much better returns buying quality foreign bonds via ETFs and actively managed mutual funds. As Japan, Australia, Canada, Europe, et al, slash rates, their existing bonds paying higher rates become more desirable and begin to appreciate. That's why PIMCO Foreign Bond (USD-Hedged) D (PFODX) is our largest position in our Investor's Edge Growth & Value portfolio.

Among US funds, we prefer the beaten-down hi-yield funds to their more conservative brethren right now. PIMCO Income A (PONAX) and Guggenheim Bulletshares 2015 (BSJF) come to mind.


We don't trade the currency markets. We have just one direct position in the US $, some options in the Aggressive Portfolio. But indirectly, it is the strength of the dollar that leads us to believe this year will be better for the small and mid cap firms that don't get paid in Euros, Yen or Yuan and then must repatriate those currencies into fewer dollars.

I believe there will be great turbulence in the currency markets this year as nations jockey to ensure they maintain trade supremacy by doing whatever they can to control their currencies. This is not an arena we choose to compete in; central bankers have slightly more resources to get their way than those of us who work for a living.

Commodity Products

We do not invest directly in commodities. If you think it's tough to compete against central bankers, try going head to head with the best minds private industry can buy.

At least central bankers have proven themselves inept from time to time; I don't want to compete in the sugar trading business with Coca Cola (KO) or in the oil business with Exxon (XOM). I'm thinking their pockets are, again, slightly deeper than mine and their very livelihood depends upon being right more often than they are wrong.

Still, the price of oil in the USA, wheat in Canada or tea in China does affect our investing, and I imagine this year will not be kind to sectors that rely upon more demand than supply for their profitability. I think oil is likely to be the big exception; the selloff has been more severe than companies' revenues justify and the Bigs are slashing CapEx left and right.

As for the US and World Economies

The markets are predictive of the economy, not coincident to it. But financial journalists must write about market ups and downs and saying, truthfully, "Hell, we don't know why it was down 300 today," must cite something. That's why they say, "The market was crushed today because GDP came in 0.3% below expectations" or "The market soared today because Alcoa delivered an upside earnings surprise."

Since we believe the markets to be predictive of future economic trends, it follows that we see the macro-economic environment unfolding something like this in 2015:

We believe volatility has returned with a vengeance. If you can't take the occasional 300-point down day without having your cardiologist on call, buy bonds.

Inflation is DOA right now and likely to remain so for most of the world for this year.

Europe and Japan may well surprise on the upside as they stimulate their economies.

Most emerging markets will be moribund. There will be exceptions.

The housing recovery will accelerate, as will consumer spending. Capital spending and wage growth won't accelerate, however, keeping growth steady but not exciting.

A Fed rate increase in June? I doubt it; the strong US$ is already cutting into exports. This is no time to make it worse. Still, humans sit on the board of the Fed. They've cried wolf so many times, they may initiate a token increase just to show, um, demonstrate, er, pretend they are in charge of the economy rather than the other way around.


As Registered Investment Advisors, we believe it is our responsibility to advise that we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund one year only to watch it plummet the following year.

We encourage you to do your own due diligence on issues we discuss to see if they might be of value in your own investing. We take our responsibility to offer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we "eat our own cooking," but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

4 / 5 (1 votes)

GuruFocus Screeners

Related Articles

Q&A with Gurus