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Four Years in and the Bull Market Still Has Room to Run: Nick Colas


You've surely heard of the game investors play where they try to quantify how much of the stock market's 100-plus percent gain over the past four years is attributable to Ben Bernanke and his interventionist Federal Reserve. Of course, there will never be a precise answer to this riddle but, generally speaking, "a lot" seems to be a figure that most people can agree on. This includes Nick Colas, chief market strategist at ConvergEx Group who says the market is not only "still married to the Fed" after four years, but that this bull market isn't as old and tired as many people think.

"We're in the mid-life crisis of this rally. We're not newlyweds, but we're certainly not hitting old age yet," Colas says in the attached video.

As optimistic as this might sound, Colas is not without concern, particularly about how the Fed's involvement has skewed how different sectors move together, or correlate. Historically, he says, about half of the market's moves were based on the fundamentals of a particular group, while the other half was linked to the overall mood and direction of the market as a whole. It has been a pretty clean and simple formula, a 50-50 split, consistently for the past 50 years.

However, something strange has happened to the recipe since 2009, at the exact same time that Ben Bernanke began to openly try to intervene by inflating assets prices in order to boost confidence which in turn would lead to hiring.

"We found that correlations remain very very stubbornly high," Colas says, revealing that four years worth of monthly analysis of sectors has seen an average correlation, not of 50%, but of 85%.

"Basically a rising tide should lift about half of all boats, when in fact, rising tides are now lifting about 85% of all boats," he summarizes.

"So what?" you might ask. "What is so bad about stocks going higher?"

The problem with such high correlation, Colas explains, is that a diversified portfolio can only exist if it has non-correlated assets, so that when one part zigs, the other portion zags, and so on. "When correlations are this high it's very tough to manage risk," he says.

Without sounding alarmist, Colas points out that Gold (GLD) and Silver (SLV) are still highly uncorrelated with stocks and moving in accordance with their historical norms. Still, concern emerges when talk turns to the Vix Volatility Index, which is sitting at a six year low at a time when stocks are at record highs.

"When the Vix is very low people think they have the whole world figured out," he says.