The Dow over 15,000…the S&P 500 over 1,634…the Nasdaq at highs not seen since the 1990s Tech Boom… Any way you slice it, we’re in a bull market.
Alas, we’ve been here before, and it didn’t end well. So, is it time to worry?
My answer is “no,” or at least “not yet.” The conditions are simply not in place for a major bear market.
Morgan Stanley chief investment strategist David Darst, whose book The Art of Asset Allocation I keep next to my desk, recently listed his “bear market checklist” of things to look for. And by his estimation—as well as mine—none are showing signs of warning:
- Is the Fed tightening monetary policy? No, they are actively debating more stimulus.
- Are stock price valuations stretched? Hardly; they are slightly below long-term averages.
- Is investor euphoria present? Not that I can see; most investors I meet are underinvested in equities and overly heavy in cash.
- Are bond spreads widening? No, and some risky bond sectors have yields at or near all-time lows.
- Is there a recession looming? This is more complex; in the U.S., the answer is “probably not.” In Europe, the answer is “probably,” though both the U.S. and Europe have been in what I call a long “slow motion” recession since 2008.
- Are cyclical sectors retreating? Actually, they have lagged all year and are just now showing signs of life.
Of course, Darst’s list is very U.S.-centric and doesn’t take into account developments in Japan, China or Europe. Japan concerns me—a lot—and I expect it to suffer a 2008-caliber blowup within the next few years. But for now, Japan actually appears to be showing signs of life for the first time in a very long time. China is slowing, but it is also undergoing a transformation into a more consumer-driven economy; the jury is still out as to what this means for the global economy.
And Europe? For the best gauge of what’s happening in Europe, check out Spanish bond yields. Since the beginning of the year, the 10-year yield has slipped from over 5% to just barely over 4%, and the downtrend remains firmly in place. Bond investors are clearly warming to the country that is viewed most at risk of “blowing up” the Eurozone.
The Spanish private sector is still is deep recession, and small and medium sized businesses are being starved of the capital they need by a zombie domestic banking sector. These are problems that are not going away tomorrow. But judging by the reaction of the bond market, they are problems that are known and under control.
My advice? Stay invested. If you’re nervous, rebalance your portfolio and take some small profits. But maintain an aggressive portfolio, and if you’re adventurous add some European exposure. My favorite ways to play Europe today are via the iShares MSCI Spain (NYSE:EWP) and iShares MSCI France (NYSE:EWQ) ETFs. I hold both in my Tactical ETF portfolio.
Plan on holding for the remainder of 2013, or until something significantly changes in the checklist above. I would recommend something along the lines of a 15-20% trailing stop.
The article first appeared on TraderPlanet.
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