I have been exposed to swanitis. In fact, I believe that I have contracted the most virulent form of the disease, black swanitis. I am not alone. Almost everyone I meet on Wall Street these days shows some symptoms.
The exact nature of the disease remains to be determined. It could be a benign affliction, like cowpox, which inoculates us against more fearsome maladies yet to come. Or it could be a form of paranoia or depression which causes us to expect the worst outcome and believe that the most unlikely scenario should be the one for which we plan.
Either way, it is an epidemic among investors. Survivors of the last 10 and, certainly, three years have come to expect something to happen, happen soon, and happen in a way that is not good. I mention it now because I fear that it may be clouding my observations if not my judgment.
We have believed for some time that the equity market would remain locked in a trading range. While we have been optimistic that that trading range ultimately would be resolved to the upside, we believed that it was just too soon for stocks to move significantly either up or down. It is too soon to say that the equity market is either fixed or clearly on the way to being fixed. Conversely, it is too early to tell if it is falling or will fall apart. National leaders and central bankers seem to see the issues before us. Even if they cannot quite get themselves to take the bitter medicine, they can, at least, delay the symptoms for awhile. If big moves up or down appear unlikely, then we are left in a trading range until solutions are found and forced on us.
To us, a continued trading range is still the most likely scenario. However, as the S&P 500 crowds against the upper end of our projected band (1375), we must wonder aloud if all that is holding it back is the specter of the black swan.
Nothing is truly fixed. All of the excesses of the last 25 years remain unaltered and, largely, unanswered. Their potential fallout and the need to fix them hang over us like a storm cloud. On the other hand, U.S. unemployment seems to be declining, the Europeans appear to be confronting their issues (and each other), the Chinese and Indians seem to be swinging toward stimulus, and corporate profits continue to positively surprise (if only at a slower pace). At 13 times consensus 2012 earnings estimates, U.S. equities seem well valued and, perhaps most importantly, the Federal Reserve seems committed to making sure that nothing that they can control goes very bad in the next two years.
What’s wrong with that picture?
My initial, intuitive answer is: “There are systemic problems throughout the world. Something is going to happen somewhere.” I suspect that I am not the only one thinking this.
Hence, my self-diagnosis of swan flu. Without it, I wonder if the U.S. market would not be moving higher. More importantly, if nothing bad does happen in the short run (that is a big IF), perhaps the Bears are vulnerable to a capitulation fit. That could add a quick 10-15% to prices with no fundamental change or driver.
This will likely not happen and, if it were to happen, it could very easily be retraced. Still, we all know of times when the power of money makes markets do irrational things.
So we will stand pat. We like stocks for the long run but believe that the most likely, rational prospect is that we are near the upper end of a trading range. We still recommend that investors hold or buy stocks for the long run. Perhaps the best thing to do now is to “look over the valley,” even if that valley turns out to be a small hill. Sometimes what you think is a black swan turns out to actually be just another ugly duckling.