I don’t care, I love it!
- Joshua M Brown
- October 6th, 2013
What a difference a rally makes.
I’ve had a dozen or so reporters ask me this week why the markets weren’t expressing any real concern about the fact that the government is shutdown. I’d told them all that if this were taking in place in 2011 or even early 2012, we’d have been back to flat-on-year in the S&P already. But it’s not 2011 or 2012, and “headwinds” are now looked at as opportunities rather than as potential black swans. And this goes a long way toward explaining the radical sentiment shift that only a ball-busting 50% risk-on rally can produce.
You may remember the darker days of the recovery period we’re living in when it was considered goofy and stupid to be positive on the stock market.
One of my favorite moments that perfectly encapsulated this pervasive feeling happened in early February. I was reading a story about pension fund managers who, after missing four years of upside, were only now beginning to dip their toes in the water. It hit me like a ton of bricks – I said “This is it, this is where the true sentiment turn takes place.” The guys running massive pools of assets were, slowly but surely, coming out of their protective little tortoise shells.
The rhetorical contortions the managers were putting themselves through so as not to come off as performance chasers were epic and hilarious. For example, how about this baloney sandwich:
“investors are taking short-term tactical advantage of the rising equity premium by, for example, allowing multiasset managers to drift toward the higher end of the equity allocation range.”
LOL, that’s a hundred dollar answer where a five dollar answer would do – anything but admit out loud that they were buying stocks.
Anyway, markets have come a long way and the psychology of the day has almost completely flip-flopped. To do anything less than buy on every dip is now looked at as foolish and pointless. Nobody is embarrassed about their equity allocations these days, and this explains perfectly why the market hasn’t crashed yet a week into the government shutdown.
Here’s my friend Dynamic Hedge, who perfectly captures this moment in investor sentiment:
The taboo of optimism has completely eroded. It appears that people are less afraid to admit that they are bullish on stocks than any time in the last four years. Even as the US government is reaching Euro-zone levels of political dysfunction with a potential default weeks away, the markets behave as if it were just a regular week. Why is this? The shutdown is a political gambit — one that would never be undertaken if stocks were 30% lower. In addition to that, most seasoned political observers have communicated the conclusion that the shutdown amounts to not much more than a branding stunt for the Republican party. So the primary perceived risk is missing a pullback and there is a strong consensus that the shutdown is merely political theater. What happens if the consensus is wrong and the situation devolves to Francis Underwood levels of ego brinkmanship? Things will get surreal in a hurry. Asset prices are the primary driver of sentiment. Sweeping reforms will be forgotten if asset prices dive.
Josh here – I gotta tell you, I much preferred it when I was getting mocked each time I said Get Your Shit Together or Optimism as a Default Setting or Their Risks are Our Opportunities or No, It’s Not 1999. The bandwagon has gotten more crowded, stocks are up 19% this year with only 5% earnings growth, which means that the multiple expansion from improving sentiment has done most of the heavy lifting.
I’m not sure how thrilled I am to currently be holding such a popular opinion these days.
But in the meantime, investors don’t care about the shutdown and they love the possibility of the dip that may come as a result of it. Quite a change in attitude from just a year or two ago.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.