By Bryan Perry
Critics of the current global rally in equities make a big issue of how, if central bank stimulus were not present, major market indexes around the world would be in a protracted downtrend. They claim current valuations are not supported by fundamental growth on the top and bottom lines among the biggest market-leading companies. With most of the S&P 500 companies having reported first-quarter results, one could agree with the bearish camp that revenue growth was subpar. However, because of efficiencies, cost cutting and stock repurchases, profit growth for the quarter was above average.
One person that has the full attention of both large and small investors is Appaloosa’s David Tepper, arguably the best-performing hedge fund manager for the past decade. During the Sohn Investment Conference held in New York on May 4, Tepper once again spoke to a packed house on his view of the current investing landscape and what he might be doing with the $18 billion he oversees in his fund.
Tepper forecasted back in December that the S&P could rise at least 8% in 2015, based on the strength of the U.S. economy and fair price-to-earnings ratios. After a soft first quarter for the economy, inflicted by a very long and bitter winter, Tepper said the S&P index is a “little cheap,” even after the measure rose toward a new closing record of 2,125 that was recorded on April 27 and, of this writing, remains the top end of the range.
Known for leaving his audience with a Tepper-ism, the boisterous fund manager cautioned market naysayers that investors shouldn’t fight accommodative central bank policies in the United States, Europe, Japan and China that are usually bullish for stocks in those regions. The key takeaway comment of the entire conference was when he blurted out, “don’t fight four Feds.” And so another golden Tepper moment made financial headlines everywhere.
On a much smaller stage, the very same message has been a weekly drumbeat of Cash Machine. Back in February as the market began to catch a bid, the opening comments of the monthly newsletter included “investor perception once again trumps reality, as global quantitative easing (QE) outside of the United States has market participants clamoring for equity exposure when the alternative of miniscule yields from fixed income drives capital flows into risk-on income asset classes.” The S&P touched 2,120 by Feb. 26 and has struggled and failed to clear that level after four more attempts.
In light of the less-than-stellar first-quarter earnings season and a weak set of economic data points from the United States, Europe, Japan and China, it should be ever more clear that the Federal Reserve is going to remain hesitant to raise short-term interest rates while the European Central Bank, the Bank of Japan and the People’s Bank of China stay the course of furthering QE in each of those economies. And that reality came to light last Friday when buyers of equities stepped in big time following the release of the U.S. employment report.
With fears of Fed tightening beginning to ease, the dollar rally that was negatively impacting foreign exchange and trade has retreated 7% in the past month and the 10-year Treasury yield is backing down off of its recent high of 2.25%. In addition, the price of WTI crude is trading back under $60/bbl and the S&P is on the verge of a fresh upside breakout after Vanguard Funds saw record outflows from equities during the late-March-through-April time frame in what is now looking like a rush to judgment.
The newfound love for equities, now called the “Mother’s Day rally,” has money pouring back into dividend-paying sectors with the market having given the “all clear” sign for Fed watchers and worriers. The S&P index has been building a technical base for almost four months. Once the old high of 2,125 is breached, that same money that rushed out of the stock market back in April will come right back in with the same energy. Although Cash Machine has been staying on message about not fighting the four Feds, it took a kingpin in the industry to reassure investors, and especially income investors, that the “risk on” trade for equity income is alive and very well.
In case you missed it, I encourage you to read my e-letter column from last week about how earnings and ‘unicorns’ point to the future of the markets. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.
Upcoming Appearance
I invite you to join me at the MoneyShow Las Vegas, May 12-14, 2015. With stock picking taking on renewed importance as the market shows signs of volatility, this event offers an opportunity to hear from a number of experts, including my Eagle Financial Publications colleagues Mark Skousen, Doug Fabian and Chris Versace.
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