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Wall St. Bears Turn Bullish, Investors Agree

Cinthia Murphy


A roster of financial-market heavy hitters have come out in recent days waving their bullish flags and hailing the virtues of buying into U.S. equities right now, as the stock market dances around record-high levels, and the overall economy shows signs of improvement.

The rhetoric has been loud and clear, with the likes of banking analyst Meredith Whitney, who became a household name after predicting Citigroup’s troubles before the financial crisis in 2008, quoted by CNBC as saying she has never been “this bullish on the U.S., on equities” in her entire career.

Her strong language came just a day after Morgan Stanley’s U.S. equity strategist and noted bear Adam Parker revised his projections for the S'P 500 in a research note, raising his 2013 target to 1,600 from his previous November-released estimate of 1,434 by year-end. It closed on Tuesday at 1,538.34.

The two of them, and others such as Deutsche Bank’s David Bianco and Goldman Sachs’ David Kostin—all known for their less-than-bullish views on the markets, as the Wall Street Journal noted Tuesday—are now part of what seems like a growing club of strategists who see the U.S. stock market as a super-safe bet given many of the uncertainties still in the global economy, most recently problems in Cyprus.

So far, ETF investors seem to be listening. In the month of February, they poured more than $3.70 billion into U.S. equities ETFs and have added another $9.4 billion into the segment in the first two weeks of March alone, according to data compiled by IndexUniverse.

The massive inflows have helped propel total U.S.-listed ETF assets, along with market action, to unprecedented levels hovering around $1.45 trillion—and U.S. equities ETFs now snag nearly half of that total.

The inflows came as the Dow Jones industrial average raced to record level after record level for 10 days straight, while the S'P 500 last week came within roughly 2 points of its still-unmatched 2007 record high closing. The $12.5 billion SPDR Dow Jones Industrial Average ETF (DIA), tracking the Dow, also climbed to brand new highs, closing one day last week at $145.33 a share, its highest closing strike ever, while the $127.7 billion SPDR S'P 500 ETF (SPY) forged new highs.

The fundamental backdrop seems to point to an improving economy if the latest round of economic data is any indication. Dropping unemployment rates, recovering housing values, strong retail sales and measured inflation targets all are adding fodder to the perception that the worst of the 2008 financial crisis might be in the rearview mirror.

A quick look at a chart will show that since the Dow bottomed at 6,547.05 on March 9, 2009, at the height of the U.S. credit crisis, it has climbed nearly 8,000 points, or some 122 percent to forge a new record-high closing of 14,539.14 last week on March 14, roughly four years later.

Dow Jones Industrial Average

High Correlations Not An Issue

This bull market so far has proven to outlive the skeptics. Historical perspective might not be as useful in the current environment because the amount of liquidity being pumped into the markets by central banks—and the amount of time this has been going on—is unprecedented, some say.

High correlations among a range of assets and industry sectors could be a telltale sign that the capital markets are “absolutely comfortable” in this current phase, ConvergEx chief market strategist Nick Colas said in one of his recent daily commentaries.

“Since October 2009, we’ve tracked these statistics on a monthly basis, with an eye to spotting when they would begin to resume more ‘normal’ proportions,” Colas said on March 12.

“The common wisdom on Wall Street has long held that industry sectors were only about 50 percent correlated to the market as a whole. The other 50 percent was tied to their industry fundamentals,” he added. “We’re still waiting for correlations to decline.”

Last week, he said average U.S. sector correlations to the S'P 500 hit 85.2 percent in the last month, showing that industry sectors remain “every bit as correlated” as they have been on average for the last three years or so.



“It seems equities are still happy with their marriage to the Fed,” Colas said. “They aren’t trying to behave as they did before they got hitched.”

“Back then, correlations were lower,” he said. “Now, correlations are high—and have remained so for years—with no change even as we reach record territory for the S'P 500.”

This environment seems to be good for investors who are long U.S. equities, Colas said.

If nothing else, stable correlations have led to the CBOE Volatility Index, or VIX—the market’s leading measure of volatility—to plumb new lows almost on a weekly basis; something that should continue to bode well for investors betting on equities or betting on volatility, Colas noted.

“Lower correlations are a necessary part of long-term asset allocation and portfolio management,” he said. “But for now, low volatility has replaced them with short-term predictability of asset prices.”

Indeed, trading volume in futures contracts linked to the VIX, commonly known as the market’s “fear gauge,” has risen as the equities markets rallied.

“February was the first time that total monthly volume in VIX futures eclipsed the three-million-contract mark and the sixth consecutive month volume surpassed the 2-million-contract mark,” CBOE said in a release at the time.

In January, average daily volume, total volume and single-day volume in VIX futures reached all-time highs, records that were again broken the following month in February, according to the CBOE.

’A Broken Clock Is Right Twice A Day’

Still, as Axel Merk pointed out on Twitter recently, the Dow and the S'P 500 might be near or at record high levels, but so is the number of people on food stamps—a reality check on underlying economic circumstances, to be sure.

Moreover, renewed concern about potential contagion from Europe’s ongoing debt crisis is another reminder of the fragility of the U.S. economic recovery.

But at the end of the day, investors may just need to ignore all the predictions and all the CNBC broadcasts and simply stick to their asset allocation plans.

“They are nothing more than guesses; that’s all those are,” Carl Richards, certified financial planner and director of investor education for BAM Alliance, told IndexUniverse about the latest round of market predictions.

“Just remember the old saying that even a broken clock is right twice a day—you make enough public guesses and some are bound to be in the ballpark,” he said.

“It’s much better—especially as an investor using passive tools such as index ETFs—to pull out your investment and remind yourself why you are investing in the first place,” added Richards, who also wrote the book “The Behavior Gap.” “Then, stick to that plan and ignore the guesses from Wall Street.”

Meredith Whitney, for instance, has had her credibility questioned before. As recently as 2010, she was calling for widespread defaults in the municipal bond market, saying they would serve as the catalyst for the next wave of the U.S. economic crisis. By most measures, analysts argue that her prediction didn’t materialize.

Morgan Stanley’s Adam Parker, too, touted as one of the most accurate forecasters in 2011, pegged the S'P 500 to end 2012 under 1,200—missing the target by a sizable margin, as reported on at the time.


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