財經觀察 2010 --- Barron Big Money VS Bob Farrell Rule #9

When all the experts agree, sometime else will happen

Last week we invoked Bob Farrell's Rule #8 about the three stages that characterize all bear markets. Today, it's time to highlight Rule #9 which is that "when all the experts and forecasts agree -- something else is going to happen".

Sentiment is too bullish on equities

So, with that in mind, we recommend that you have a look at the Barron's Big Money Poll in this week's edition: 59% of the portfolio managers polled are bullish on the equity market while only 13% are bearish. Fully 84% are bearish on Treasuries whereas a puny 3% are bullish. In fact, Treasuries are the asset class with the least bullish sentiment and equities are clearly the asset class most in favor right now -- though 58% do like oil, 51% like corporate bonds, 32% like gold, 11% like cash and 10% like real estate. It's really amazing that bulls on real estate exceed bulls on bonds by a factor of over three. However, what is most telling is that for every bond bull there are currently twenty bulls on the stock market.

Sustained bull markets require vigorous recovery

In any event, here's the rub, as Hamlet said in his soliloquy: The consensus forecast from this group of market-watchers polled in Barron's calls for real GDP growth of only 2% in the four quarters to mid-2010, which is practically flat in per capita terms. Yet, we went back to all the cycles back to 1949 and found that the onset of sustained equity bull markets requires a vigorous post-recession recovery.

The 1990-91 turnaround was the exception

The only time in the past six decades we actually saw a sustained post-recession bull market with growth this weak was in the 1990-91 turnaround. Then again, at that time, we were coming off the shallowest recession in the post-war period. As mentioned, the consensus from the Barron's poll is also calling for a 10% profit rebound through mid-2010, which again would be rather tame in the context of a post-recession recovery when it's much more normal to see earnings recover 15 to 20%.

Why the rallies of 1981 and 2002 proved to be head fakes

Sustainable post-recession equity bull markets usually require a vigorous tailwind, which is why the rallies of 1981 and 2002 proved to be head fakes. The sustained rallies in both periods were delayed by a year until the economy managed to display more vigor. And ultimately, it did. The reason why the late 1982 and late 2002 lows held for good was because we saw nearly 6% real growth in the year after the '82 lows and almost 4% in the year after the 2002 trough. Now, those are the types of growth rates that would even cause us to turn more bullish on the equity market.