Face-off: Bulls vs. Bears Heats Up

We're seeing a face-off between Bulls and Bears. And it's heating up now.

For a while, as the stock market and bond market fell in 2022, Bears had the upper hand. Sure, Bulls were still running. But they had to run against the tide. So while so-called Perma-Bulls didn't give up the ghost, their views received shrinking exposure in the every-nonsensical financial media. In addition, from a more neutral or objective point of view, the credibility of those touting "Stocks for the Long Run" combined with Bonds to cushion volatility started to fray. (And given that a generic portfolio of 60% S&P stocks and 40 % mid-term treasuries combined for a 18% or so loss for the year, with no cushioning from the treasuries, that only makes sense.)

But now we've had some spark in stocks amid claims that the Fed will engineer a soft landing. Combine no recession with falling inflation and the Bulls have just received a shot of adrenaline. That alone doesn't necessarily mean the Bears are fleeing to their caves for the winter. But it does seem to mean that we'll continue to hear elevated promotion of bullish themes that will include, for example:

• The Economy has bottomed and will now boom again.
• The Stock Market will have positive returns, if not spectacularly positive returns in 2023.
• Inflation will continue to fall and pretty much go away. 
• The Fed will thus stop raising rates causing stocks to rise and bonds to not simply stop falling, but have positive returns.

Regarding the first point - a bottomed economy - recent earnings reports, while spotty, did contain some positive surprises, Tesla being perhaps the most prominent. On the other hand, ISM manufacturing readings were <50 - which means contraction in manufacturing. GDP has held positive. Maybe that's what's allowing claims of a an economic revival to be accepted (by some).

With this, and falling inflation, we hear the Fed will lower its next interest rate hike to 25 bps. So with economic activity positive, inflation falling and Fed easing up on its rate hikes, naturally the claim will be made that stocks will rise. Indeed, one of our sources produced a table purportedly demonstrating that when inflation falls, the stock market has had some its greatest gains for that year. 

We do have stocks in our portfolios, but have only a small allocation focused on certain sectors rather the general stock market (which might be represented by, for example, SPY). Having considered the Bullish case, we're not convinced such that we would increase that allocation now. That doesn't mean we may change our minds. You never know.

So what about the Bears?

They're still here. Simply put, since Bear Markets follow stages, we're entering the next stage. That doesn't preclude the positive sentiment and price action we've seen since 2023 launched itself. Indeed, such action must be seen as short-term. Bear Markets don't come and go in a matter of days or weeks. Sometimes it's months. But sometimes it's years. To claim we're entering the next phase of Bear Market - one that settled in during 2022 and pummeled stock holdings with few exceptions - means that the Bear will extend itself from 2022 to 2023, and likely will go on in total for over a year. It could go even longer, but we don't know that.

Most of the recent activity in the stock market, especially the NASDAQ stocks, can be seen as taking place within relatively narrow range. Unless there's a real "breakout" to the upside, there's no reason to take Bulls seriously. So Bears continue to see any positive stock action as a correction within and ongoing Bear Market.

Bears reject the thesis that the economy is perking up. They don't even accept that the economic downturn (assuming we've had one) has slowed and thereby avoided a recession. They see neither green shoots nor silver linings.

For now, we'll likely see both sides fencing with each other. 

While we try to keep an open mind, the thesis that inflation is over, or even ending, seems odd. The only possible way to justify this might be the claim that supply chain disruptions caused by either or both of the Covid Mess or the war in Ukraine have goosed prices. And as supply chain disruptions settle down, prices will also do so - or at least stop rising.

One important distinction: what's declining is the rate of inflation. That means inflation isn't rising at as high a level. But it's still rising.

Another distinction: The decline in increase in inflation has been in goods. The rate of inflation in services has not declined. 

And an important point: We surely can't claim an end to inflation if we compare our current situation to the inflation trend of 1960s-1970s. Such a comparison yields inflation percentages rising-falling-rising. If the conditions in today's economy, combined with today's government policies and the Fed's monetary policies are similar to those that prevailed then, thinking inflation is over makes no sense. You'd have to believe that there's no comparison, that our current inflation is a kind of freakish, one-off reaction to temporary circumstances. 

We're not going to argue either way. We have our views, and they guide our current investment management. You might consider noodling all this over - if you haven't already - and develop our own view.

Of course, there's always "Buy-and-Hold" or its cousin "Buy Stocks for the Long Run." If either of these make sense to you, you'll likely just stay put with your allocations with, perhaps, some rebalancing. 

In any event, the next few weeks, certainly the next few months, will likely provide more clarity. But because that clarity - if we get some - will be based on only short-term observations, the face-off will likely continue, maybe even heat up even more.

Whichever side you're on, a quick suggestion: Maybe it's not a good idea to commit to either thesis too strongly when it comes to investments and business decisions.