My monthly commentary for Fairway mentions three uncertainties: the trade conflict with China, Brexit, and the Fed. One way to look at it is through the lens of the beloved children’s tale of Goldilocks. I am breaking one of my rules by assigning human personality to the market, but if pressed I’ll just say Goldilocks doesn’t represent the market so much as market sentiment. This is a total cop out and market sentiment is such a hazy metric that it can mean anything. Whether the sentiment indicators are positive or negative, they fit any narrative as you can say it agrees with your thesis or you can say it’s a contra-indicator – like when your dentist starts talking about pot stocks. Anyways, let’s not overthink this. It’s the weekend.
The market has led a charmed decade (granted this is following a crash) despite experts’ best efforts at predicting the next shoe to drop. I’m not sure if the market was only wearing one shoe or if it took them both off at the same time, but that’s an analogy for another day. If you were invested or adding money via your 401(k), you’ve had a pleasant experience. The market has been safe inside the cabin in the woods. There have been hiccups as Goldilocks pieced together the various bear threats. The markets prospered, though, moving from recovery to expansion. For several years Goldilocks has been waiting for the bears to come home.
In the old story, the bears would return to find their home trashed and porridge raided. A complacent Goldilocks would be caught sleeping by angry bears. Trade wars, Brexit, and Federal Reserve fiddling would shock the markets. Contrary to the children’s tale, our Goldilocks has been taking a wait-and-see attitude to what she found in the house. There are three chairs in the house, three bowls of porridge, and three beds, but she hasn’t touched any of them for fear of the bears’ return. Goldilocks is tired of standing. She is hungry and sleepy. Resolution of uncertainty has taken precedence over all else. Maybe this changes the ending of the story from bears to bulls.
The porridge is all cold and the bulls are all seated, but our hangry Goldilocks is happy to sit on the floor and eat. Although it’s not a bed, the bulls might even let Goldilocks sleep on the couch. This is kind of what the market feels like to me. At this point, there have been so many bad headlines, maybe the risk is priced in and the market can start to move based on fundamentals. Investors realize that the world didn’t end after the Brexit vote. The trade war didn’t spark massive inflation. The Fed backed off from its hawkish view of a year ago.
Happily Ever After?
Our happy ending might not mean a market melt-up so much as delaying the next recession. Or perhaps it means a shallow correction rather than a raging bear market. We’ll undoubtedly see each of these over the next 30+ years, but the short-term looks pretty vanilla.