Is the bear market narrative overdone?… What bitcoin can teach you about stocks… One clue that’ll tell you the market has peaked… In the mailbag: “If I’d been a drug lord…”

Stocks have caught a bounce…

After sliding 6% in 2018… they’re up 2.7% so far in 2019.

We’ve spilled a good deal of ink here at The Daily Cut on why now is a great time to prepare for the next bear market.

But as colleague Jason Bodner told us last September, there’s still a lot of room for stocks to run higher.

Despite the 12% drop we’ve been through on the S&P 500 since it peaked last September… Jason remains bullish.

As he told us, “This is not the bottom of the ninth. We haven’t even gotten to the seventh-inning stretch yet.”

Jason is speaking from experience…

He spent nearly 20 years working for some of the world’s largest trading firms.

This included a dozen years at prime brokerage firm Cantor Fitzgerald, where he executed trades for some of the biggest investors in the world. (A prime broker is where investment banks and wealth management firms go to make their trades.)

That gave him a ringside seat to the 2002-07 bull market that followed the dot-com crash… the 2007-09 global financial crisis and stock market crash… and the new bull market born on March 9, 2009. And it made him a connoisseur of stock market cycles.

We sat down with Jason as part of our 2019 Roundtable Series – where we talk to our analysts here at Legacy Research about the threats and opportunities they see in 2019 and beyond.

Below, Jason shares some of the signs that tell you a top for stocks is at hand… and explains why he thinks we’re nowhere near it in the U.S. stock market right now.

Roundtable Q&A With Jason Bodner

Chris Lowe: Stocks have taken a shellacking of late. But you don’t think it means the end is near for the bull market. Why not?

Jason Bodner: It’s very simple. The data I see still makes me bullish. I’ve gone over these points before. [Catch up here.] But we have low taxes, record profits, and record sales and earnings growth. And that’s all bullish for stocks.

But the market is not only an expression of data. It’s also an expression of emotion. And as everyone should know, when emotion grips control, it can snowball quickly.

A good example is the “taper tantrum.” In May 2013, there was all this speculation that the tapering off of the Fed’s quantitative easing [QE] program – its buying of Treasury bonds with newly created cash – was going to be a calamity for the stock market.

But folks who ignored the panic merchants in the mainstream media… and who stayed invested in the S&P 500… have seen gains of 74% since then, including dividends.

Chris: If things are going so well with corporate earnings, what was it that spooked investors at the end of last year?

Jason: At the risk of offending some of your readers, one factor that’s been unsettling folks with money in the stock market is Team Trump. The weirdest example is Treasury Secretary Steve Mnuchin’s emergency press release the Sunday before Christmas Eve.

Stocks had been selling off hard the week before. And Mnuchin comes out with this statement that he’d talked to the heads of the six largest U.S. banks and confirmed that they had no liquidity problems.

Nobody thought that the banking system was at risk. But Mnuchin made it sound like 2008 all over again. It’s like your doctor calling you up out of the blue just to say you don’t have cancer. You might start to think something was really wrong.

The next day, the S&P 500 plunged 2.7%. That made it the worst Christmas Eve on record.

You’ve also got a lot of uncertainty surrounding the government shutdown in Washington and the U.S.-China trade war.

You may support these moves by the administration. But they’re not music to the ears of most stock market investors. Because they lead to unnecessary uncertainty over where the economy… and earnings… are headed.

The irony, like I say, is that the fundamentals of the U.S. economy are in good shape. The U.S. economy is the largest and strongest in the world. You still have growing corporate earnings in sales. And there’s no major bomb in the system like we had in the lead-up to the subprime mortgage crash.

Chris: What do you expect in 2019 in terms of stock market performance?

Jason: I’m not going to make a wild guess about the exact level the S&P 500 is going to finish the year at. Nobody can predict the future like that… although it doesn’t stop some of my former colleagues on Wall Street from trying.

Bad things can… and sometimes do… happen. At the end of the day, the stock market is a result of emotionally driven human behavior. And sometimes the crowd can be highly irrational. But in my view, this is not the bottom of the ninth of the bull market that kicked off in 2009. We haven’t even gotten to the seventh-inning stretch yet.

There are a lot of very smart bears out there – including here at Legacy Research. But I’ve been watching these cycles for two decades now. And I just don’t see the case for us going into a bear market… a recession… or a depression.

That’s not to say the bull market will go on forever. Like night follows day, a bear market will follow this bull market… eventually. But we’ve still got a long ways to go before the end.

Chris: What makes you so sure of that?

Jason: Look, nobody knows for sure where stocks are headed. We’re talking about probabilities, not certainties, here. But as we talked about before, you typically see crazy bullish sentiment right before a bull market peaks.

Look what happened with bitcoin right before it peaked in December 2017. When bitcoin was headed toward $20,000, I bumped into a neighbor who was out walking his dog. This guy is a real estate mortgage broker. And he came up to me and said, “Hey, you know financial markets. What do you think about this bitcoin?”

The same day, my mother phoned me to ask me what’s going on with bitcoin. My gardener also wanted to know if it was a good time to buy. It was the height of fervor and excess. And it marked the top for bitcoin. Today, it’s trading for about $4,000.

I just don’t see that kind of fervor around stocks now. And if you look at the weekly survey results from the American Association of Individual Investors [AAII] – a widely watched gauge of sentiment among mom-and-pop investors – 43% of respondents believe the S&P 500 will be lower six months from now. Just 33% of respondents say the index will be higher.

Chris: You’re saying that the crowd is bearish on stocks right now. Why is that so important?

Jason: Because the AAII sentiment survey is a great contrarian indicator. The mom-and-pop investors who answer this survey have a habit of getting these calls dead wrong.

As we talked about before, right before the market collapsed in 2000, 75% of AAII members expected higher stock prices ahead. That was at the peak of the dot-com boom. And at the peak of the 2002-07 bull market, 59% of AAII members were bullish about the market.

We’re nowhere near those kinds of bullish readings today.

I spent nearly 20 years on Wall Street executing trades for some of the biggest investors on the planet.

In my experience, you know we’re near the top in stocks when your cab driver turns around and says, “Dude, I just bought this stock and it’s up 80% in a month”… your gardener asks, “Hey, will you check out my Schwab account?”… and your mom is calling you asking, “Should I put more money into the stock market?”

I see none of that now.

For the most part, folks are scared of the stock market. And that just doesn’t jive with how bull markets typically end.

Right now, my mom and dad are calling me saying, “Wow! Did you see the market going down last week? What should we do?” I bet your readers have had a similar experience recently.

When a big move catches everybody’s attention like that, it’s a good indication the stock market is going to swing the other way.

Chris here – Whether another bear market is imminent… or the bull market has more room to run… the most important thing you can do to build wealth over the long term is to make sure you maintain a well-diversified portfolio.

As we showed you here, that could mean dividing one-quarter of your wealth in stocks… one-quarter in bonds… one-quarter in gold… and one-quarter in real estate.

An even simpler breakdown is the one Legacy Research cofounder Bill Bonner uses for his personal wealth. He splits his portfolio into three “buckets” – stocks… gold… and cash.

This will not only help you grow your wealth… but also preserve it… no matter what stocks do.

In the mailbag: “If I’d been a drug lord…”

Yesterday, in our ongoing conversation around pot legalization, Legacy Research cofounder Doug Casey said: “Laws turn simple bad habits into massive and profitable criminal enterprises.”

And it got your fellow readers thinking…

If all people were upright, responsible citizens like Doug Casey, legalization would be OK. But there are a whole lot of people that are very imperfect, which is why governments exist – to make laws to try to keep order in society. The sad thing is that these governments are also imperfect.

– Richard V.

A dopehead would arrive at least into his driveway without an embarrassing fender bender or injury to himself and the occupants!

But I have to agree with the comment about the need for a healthy and motivated workforce in the good old USA! We have already bankrupt our nation in the name of higher profits for corporate America by keeping minimum wage down, forcing the workforce to pay for their health care, and then shipping our production out of our country.

America’s workforce is the goose that lays the golden egg, and now, we are chasing it with an axe disguised as legal drugs. Why don’t we feed that goose a healthy meal, take care of her, and furnish her a good place to sleep and gather the golden eggs each day? History keeps repeating itself! Sad! So sad!

– Ron S.

Prohibition didn’t work in the 1920s. It doesn’t work now. The only thing it did was create a boom in organized crime and turn a lot of otherwise law-abiding people into criminals. It’s the same with drugs. Our current laws created the Mexican drug cartels. It cost us billions of dollars spent on law enforcement and putting incredible numbers of people into prison. If we’d legalized and taxed those drugs instead of spending billions, we’d have made billions to cover some of the other government expenses.

If I’d been a drug lord, I’d have been slipping anonymous donations to the hardline anti-drug politicians who created my wealth. I would, in fact, be very surprised if something like that didn’t happen somewhere along the way.

– Russell W.

Will pot legalization destroy our workforce, like Ron S. says? Or is the War on Drugs more criminal than drugs themselves, like Doug thinks? Write us at [email protected].



Chris Lowe
January 8, 2019
Lisbon, Portugal