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The S&P/TSX Composite Index and S&P 500 are up about 12 per cent and 11 per cent, respectively, from the Oct. 12 lows. But strategists at RB Advisors, including company founder and former Merrill Lynch chief U.S. quantitative strategist Richard Bernstein, believe the rally has all the hallmarks of speculative excess and won’t last long.
A Monday RB Advisors research report entitled Don’t Speculate on Speculation begins, “The stock market rally so far this year seems based largely on speculation rather than fundamentals.” The authors go on to argue that investors have been buying stock on the assumption that central banks will soon re-open the monetary spigots when the opposite – further tightening – is much more likely.
RB Advisors believes that the 2020-2021 period exhibited the five characteristics of a financial bubble: increased liquidity (falling interest rates and, in this case, fiscal support for displaced workers), increased use of leverage, democratization of markets (Robinhood traders), increased turnover and volume and rising new stock issues.
Recent market strength reflected a belief that bubble conditions were set to return but year-over-year growth in the M2 money supply – cash, bank deposits, money market funds, and anything that can be quickly converted to cash – has turned negative for the first time in modern history.
Mr. Bernstein believes that the ‘Fed put’ for equity markets is dead. Previously, central banks could step in and support stocks during deep sell-offs, confident that disinflationary factors like globalization would prevent inflation pressures from building. Now, with inflation well above central bank targets and strong labour markets pushing wages higher, central banks will continue to tighten or, at best, stay on the sidelines.
The strategists see cryptocurrencies as a bellweather of speculation and cite Bitcoin’s 43 per cent year to date rally as a sign of frothy market conditions.
RB Advisors recommends defensive portfolio positioning for the foreseeable future. They believe markets are in the middle of a long-term change in sector leadership, away from speculative sectors like technology and consumer discretionary, and towards energy, materials and industrial stocks.
— Scott Barlow, Globe and Mail market strategist
