Beyond Here There Be Dragons

{Chart of SPY is from FINVIZ.com.}

The professional investor class, that is the folks who manage investor assets for a living, the financial press and the pundit class, have by and large never really been comfortable with the bull market that began in 2009.  In particular the press, CNBC and the like, seem to have fought this thing tooth and nail as stocks have driven higher.  I have no data but it seems that until about six months ago you would see two negative stories on the markets and investing for every positive report.  Subtly it seems to me that's changed as we moved to new highs last year but it's still pretty common to see the bears trotted out each time we have a piece of negative data or bad news.  

Part of it has been the extraordinary times we've lived through in the past five years.  Josh Brown over at the Reformed Broker has a pretty good piece talking about how it may seem obvious now that stocks should have moved higher but in reality there have been many issues confronting investors all the way up.  In his words the "Easy Money" theory of that period is a myth.  I agree with that view.

Another reason for the professional investor class to really have embraced this bull market is that they've been encumbered by the past.  If generals always fight the last war then investors probably always fight the last bear market. By and large the pros didn't see the events of 2007-2009 coming and have tried making up for that by being more skeptical of events since.  We talked about this last year here.   

But there is another thing I think bothering the "pros" right now and it's that we've been sailing through uncharted waters.  The chart above shows monthly performance of the S&P 500 ETF {SPY} going back to 2006.  Prior to last year we had all these nice reference points in terms of support and resistance that investors could look to in relation to the underlying fundamentals and market valuation.  The most obvious of these levels was the major resistance formed from the market tops in 2000 and 2007.  Every time we came close to breaking through that level the market pulled back or wavered.  We broke straight through that resistance at the beginning of 2013 and never really looked back.  We've never really experienced a pullback during that period or seen a real period of consolidation.  Stocks seem to have taken all that news, both good and bad, and used each minor dip as an opportunity to buy.  This makes the professional class nervous as there's no reference points they're  used to by which to navigate.  In ancient days, mariners would speak in hushed tones about the unknown areas that lurked beyond their maps.  All sorts of monsters and unknown things were thought to be beyond those points. All manner of dragons and beasties were thought to live in the lands beyond what was then known.  That is until sailors using modern navigation techniques figured a way to sail those unknown seas and then they became just a part of the normal reference points.

That is in essence how we talk now.  We speak of a market that at best is fairly valued.  We worry about events beyond our borders, a slowing economy in China, a missing airplane that offers no explanation of where it is or what happened to it, events in Ukraine or debt issues in the developing countries.  We worry about sluggish economic growth at home, at times ignoring all the statistics that show that on an economic basis we are slowly improving.  We talk about slow housing or mall sales and don't seem to take into any account that most of the country east of the Mississippi has been locked into a winter that seems almost medieval.  We study old economic metrics without taking into account how much things have changed via technology and productivity advances.  And we are sometimes afraid.

I respect the power of the markets but I am not afraid of their fluctuations.  I say this with the knowledge that there will always volatility and that I think there is a real possibility that stocks will perhaps sleep for much of this year.  I believe that based on what we know today the long term arch of things is for the world's economies and therefore its markets to move higher.  Unless there is a game changer that we can't see over the bowsprit, I think the future is brighter than most might believe.  I know there are issues {there always are} and I am aware of the many of the forces that could change this analysis but for now I think things look much better than anybody could have imagined a few years ago.  I can't wait over the coming months to talk more about why I feel this way.

*Long ETFs related to the S&P 500 in client and personal accounts.