Go, and beat your crazy head against the sky
Try, and see beyond the houses and your eyes
It’s okay to shoot the moon.
–Darling Be Home Soon, The Lovin’ Spoonful
After two weeks of persistent and consistent new highs for the U.S. equity market, I hear mutterings that it can’t go on forever. Many who said that the market couldn’t go up because it hadn’t gone up now say that it can’t go up because it has gone up. I think that they have a little bit of amnesia. It is not unusual for bull markets to end with (what can be) a multi-year burst of enthusiasm. I have called this the “Pull Bull Market” and, if it runs true to form, it could be a good time for investors and, particularly, active investment fund managers.
I have talked about this before but I think it bears repeating. The transition from a push bull market to a pull one appears to be happening now. It required patience when we were waiting for it to happen, and, I suspect, it will require patience as we wait for it to reach its eventual end.
In my opinion, all major bull markets have two distinct phases: the push and then the pull. The push phase begins when the central bank decides that the county’s economy needs stimulus and uses rate policy (and, more recently, quantitative easing) to push money toward the real economy. The Federal Reserve (Fed) is trying to make the money we would use to build houses, buy cars, or start businesses seem cheap. However, on its way from the Fed to the economy, that money flows through the capital markets and tends to inflate them as it continues.
How long does the central bank do this? How long does it have to do it until it works? The Fed will usually stop pushing when it thinks it no longer has to, and then the Pull phase begins: Things get better or the Fed doesn’t stop pushing. When things get better”, fundamentals improve; when fundamentals improve, earnings get better; when earnings get better, investors tend to stop believing that we are at or near the end of the economic cycle and put a better price-to-earnings multiple on improving earnings.
I think that is good and I think it is happening now.
I also think that the switch from a push to a pull market changes the dynamics of outperformance. Up till now, with money being pushed in, fundamentals (or Alpha, to the smart kids) was hard to fathom. Money went where it was easy to go. Now, going forward, I would think that better fundamentals will pull in more money and make for better prices. If I am right, superior money managers should have a chance to show their talents. That could change things, again, I think, for the better.