E EC HH Bull Markets Climb A Wall Of Worry

Bull markets climb a wall of worry.  Bull markets end when no one is any longer worried about anything.

Bear markets then decline as more and more investors throw in the towel.  Bear markets end when most investors swear off investing in the market.

Why this reminder?  One of our clients wrote last month and asked if I believed we should be in the market at all.  Consider, after all: Europe is in shambles.  China is decelerating.  Oil, gas and most essential commodities are down, down, down and face a glut as there is more supply than demand for almost all of them right now.  4th-quarter earnings of US companies are only so-so.  Expectations have been lowered hugely for 2015 future earnings.  Our president speaks of helping the middle class, yet his policies have harmed working families the most.  We’ve never reached such heights in the market. Mark Hulbert, who monitors and reports on a subset of financial writers, began a recent article, “The U.S. stock market’s major trend now is down, so act accordingly.”  This bull is older than almost every bull market in history.  Etc.  Etc.

All true.  All worrisome.  But bull markets climb a wall of worry.  It’s possible, of course, that this particular one will end with a failure to break out and without the usual euphoria that typically accompanies the end of a bull.  Or maybe it ended in December, with that euphoria, and now it is merely gasping for air.  (Mr. Hulbert’s piece, citing 2 of 3 adherents of Dow Theory, seems to suggest this as a distinct possibility.)  If this is the case, we’ll add to our defensive positions — but I don’t believe it is.  Here is what I see in the coming year in both the markets and the economy…

While our firm practices asset allocation for about 85% of our, and our clients’, portfolios, we are not dogmatic about it.  If there is an obvious opportunity like, say, buying the biggest and best oil companies with a view to long-term recovery, we will slightly change our reallocation matrix to over-weight this or that sector or asset class.  We do this knowing we may sacrifice small gains in the short term for significantly larger gains in the future.  We live in the present and plan to live even better in the future, so that’s the way we invest.  With that in mind, here’s our take on…