Kass: The Madness of (Investing) Crowds

The comments below are an edited and abridged synopsis of an article by Doug Kass

Fear of a large drawdown seems to have been eliminated in the minds of market participants, as the Bull Market of Complacency has reappeared.

Last year was one of hope and anticipation (largely because of the optimism surrounding lower corporate tax rates) as price earnings ratios expanded by almost three multiple points. Interest rates were still suppressed, and volatility was at historic lows. Last year, Wall Street recovered and prospered better than Main Street.

In 2018, markets are more or less unchanged as the reality of instability and inconsistency of policy and economic uncertainty have re-emerged. This year, Main Street has thrived, and Wall Street has stagnated. And a new regime of volatility has emerged, coincident with a general rise in interest rates—particularly in maturities of 10 years or less.

Kass summarizes his top 10 current market concerns: A tug of war between fiscal expansion and monetary contraction; growing ambiguity in domestic and non-US high-frequency economic data; the rise in global interest rates; the Orange Swan, which represents clear risks for the equity markets and for the real economy; investor sentiment has grown more optimistic, and fears of a large drop in stocks has been all but disappeared; technical and resistance points mark a short-term threat to stocks; the dominance of passive and price momentum based strategies are exaggerating short-term market runs; after nearly a decade, both the market advance and a sustained period of domestic economic growth have grown long in the tooth; though market valuations are high, they are not too stretched—but other classical market metrics (equity capitalization to GDP, price to book, price to sales) are very stretched; and a new regime of volatility might signal a change in market complexion.