Indeed, the confluence of the aforementioned fundamental, sentiment and valuation issues can potentially be considered the Golden Triangle of the Bear Case. Given the consistency and steadiness of the market rise, few are willing to make a negative bet.Īs mentioned recently, short funds have become a pimple on the back of the complex of exchange traded funds. To be sure, the short community is somewhere between decimated and non-existent. And today, the absence of shorts – unlike in previous periods of market strength – will not buffer or cushion a market correction or bear market. In these times, Leo Reisman’s “ Happy Days are Here Again” and Ethel Merman’s “ Everything is Coming Up Roses” are minor songs/players and might have to move over to the melodious and more ecstatic and certainly more current, Pharrell Williams’ “Happy.”Īrguably, Mr. Market is beginning to launch into the giddy phase, in which rose-colored glasses have replaced the camera with a stick – GoPro (GPRO), which is now out of favor – as the most preferred accoutrement. doesn't totally control its economic destiny in a flat and interconnected world.Nevertheless, despite the enthusiasm and extraordinary price momentum, I anticipate that my next move will likely be to meaningfully increase my short exposure (but only on a momentum break). It is important to remember that many of the most important supply chains lie overseas, where more restrictive business and social closures have been put in place. Continued supply chain problems that, in part, fuel inflation and inflationary pressures to levels well above consensus.Less liquidity could result in a marked reduction in flows into equity funds, which has provided unprecedented fuel to the markets in 2021. A more aggressive Fed than is reflected in general expectations.With continued high inflation - a regressive tax, a continued widening in the income/wealth gap houses a wide range of social, economic and political problems and investment ramifications.Modest EPS growth, if any growth at all, when combined with lower valuations could translate into negative overall returns for the S&P in 2022.However, contributing potential negative influences include likely margin pressure from higher costs, a Fed tightening, some evidence of pulling forward demand, etc. One of the biggest surprises this year has been the resilience of corporate profits. Disappointing EPS growth, probably under 5%, compared to higher expectations.To some degree, this reflects the Fed's pivot, which will likely produce higher interest rates, serving to adversely impact discounted cash flow models of long-dated growth stocks. A hard rotational shift from growth to value.Considering today's elevated valuations, that reset has the potential of being more than the historic average. On average, over history, a 100-basis-point rise in fed funds rates is associated with about a 15% valuation adjustment lower. This is the most important part of today's opener:
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