Category Archives: Quarterly Review

Every Time it Gets Cloudy This Bull Market Finds a Way to Shine Until Tomorrow

2nd Quarter 2019 Letter

Let It BeThe Beatles

And when the night is cloudy there is still a light that shines on me
Shine until tomorrow, let it be
I wake up to the sound of music, Mother Mary comes to me
Speaking words of wisdom, let it be

Let it be, let it be, let it be, yeah, let it be
There will be an answer, let it be
Let it be, let it be, let it be, yeah, let it be
There will be an answer, let it be
Let it be, let it be, let it be, yeah, let it be
Whisper words of wisdom, let it be

Source: LyricFind
Songwriters: John Lennon / Paul McCartney
Let It Be lyrics © Sony/ATV Music Publishing LLC


It’s official. July 1st marked the date of the longest economic expansion in U.S. history. As the Beatles sang in their iconic anthem, “Let It Be,” every time the night gets cloudy for this bull market there is still a light that manages to shine through. Will this record-setting expansion shine until tomorrow?  Should you just sit by patiently and let it be?  These are questions that have been vexing economists and financial advisors for quite some time, so let’s try to bring some clarity.

Yes, the U.S. economy is in the midst of its longest expansion on record—121 months and counting–but some other milestones are being surpassed that could change the dynamic of this market. Take interest rates. As mentioned in my letter to you last quarter, the U.S. yield curve has inverted for the first time since 2007. True, the curve initially corrected itself after inverting earlier this year, but it quickly inverted again and has remained that way for over 30 days. Again, an inverted yield curve means investors are being paid more for holding very short term debt than they are for holding long-term debt. It’s counter-intuitive and usually means investors are very nervous about the future.

Longest Economic Expansion Since WWII.

Another eye-catching statistic is that the performance spread between growth stocks and value stocks is at its fourth highest level in a century.

As BlackRock’s Andrew Angle noted, “The value drawdown that started at the beginning of 2017 is one of the worst investors have faced.” 

Yield curve update and global interest rates

As mentioned in last quarter’s letter, the yield curve inversion is not a timing mechanism, since the market historically performs pretty well another 12 to 18 months post-inversion. We also saw yields on the 10-year Treasury bond break below 2 percent in Q2 of this year—a time when $12 trillion of international bonds are trading at negative interest rates in the midst of a global move downward. That could be a massive amount of money essentially being parked in shoeboxes under investors’ beds!

Source : Torsten Sløk, Ph.D.Chief Economist Managing Director Deutsche Bank Securities

Everyone is talking about the end of the long-running bull market in U.S. equities, but in the second quarter of 2019, the most crowded trade in the world became U.S. Treasuries. Even though rates are abnormally low, the Fed Funds futures market is now signaling a 100 percent chance that the central bank coule ease its monetary policy next month. Incredible!

Here are some excerpts of the notes coming across my radar recently:

For the first time ever, being long US Treasuries was considered the most-crowded trade according to the June global fund manager survey conducted by Bank of America Merrill Lynch.

The bet on government bonds beat out popular crowded trades such as tech, high-quality and emerging markets, each of which has occupied the list’s top spot since 2013.

The study was released Tuesday during a week in which traders were watching multiple events that could set the course for global growth going forward: the Federal Reserve meeting Wednesday, and the G20 summit later in the month.

Historically, when equity bull markets end money pours almost exclusively into stocks. But today, we have seen government bonds beat tech stocks as the most crowed trade in the market and bond ETF assets have doubled over the past year alone.  I don’t know anyone who is bulled up on stocks–, it’s the single biggest anomaly I have witnessed in my 20-plus year career in finance. As mentioned in previous letters, the Great Recession of 2008-09 caused the massive equities risk hangover we haven’t seen since the Great Depression of 1929.

Bond ETFs double assets in one year

As shown above, bond ETFs are booming. According to Dave Lutz (Jones Trading), essentially every category has recorded double-digit growth in average weekly volumes between last year and 2019.

With the inverted yield curve being in place as the first serious sign of a recession in the near future, could the American investing public be right?  After hundreds of years of market flows proving the American public and professional investors as horrific market timers, could this time be different?

As I discussed in my Q1 letter, it’s important to be sure that an inverted yield curve is not just a temporary anomaly:

“First, it’s important to remember that not everyone uses the same definition of ’inversion.’ Like the San Francisco Fed, I consider an inversion to be a situation in which the yield on 3-month Treasuries is higher than the yield on 10-year Treasuries. According to the Cleveland Fed, inversions of that 3-month/10-year spread have preceded each of the past seven recessions, including the 2007-2009 contraction. The Cleveland Fed acknowledged there have been two ‘false positives’ — an inversion in late 1966 and a ’very flat’ curve in late 1998.

First crack in the bull market, but don’t get fooled again

Refer to last quarter’s letter for details about historical returns post-yield curve inversion. Again, the important piece of new data this quarter is that the inverted yield curve has remained inverted—it’s not a temporary blip.

Why aren’t oil prices spiking—another key recession indicator?

Most finance textbooks and market historians argue that recessions are caused by the Fed raising rates and/or oil prices spiking. As Moody’s chief economist Mark Zandi told CNBC, “Quickly rising oil prices have been a contributing factor to every recession since World War II.”   

The first 17 years of my finance career were spent on a trading desk. If you ever had a situation in which Iran attacked oil tankers in the Strait of Hormuz and shot down a U.S. military drone in the same month, you can bet your butt that oil prices would skyrocket!  But today it’s different. Sure, Iran’s recent actions put us on the brink of a hostile U.S. military response, but the price of oil barely budged. Further, the oil volatility index was rolling over just a few days later. Which is hard to believe!

It’s almost unthinkable that President Trump was within hours of a military response against Iran and oil only moved 2 percent higher. But the next several charts help explain why:  

Crude oil production exploded after the 2008 Great Recession

Ed Yardeni


As domestic oil supply expanded to the point that the U.S. become a net oil exporter, our reliance on Persian Gulf crude evaporated. In late June, President Trump said the U.S. may lessen its role in the Strait of Hormuz as domestic oil and gas output grows and our energy imports from the Middle East decline.
Combine massive oil supply and demand changes with climate change and shifting attitudes toward clean energy technology and you have an impetus for massive economic transformation in the Middle East. United States imports of Persian Gulf crude are down by nearly 70 percent over the 10 years. As a result, a number of Middle Eastern countries will need to adjust their economies substantially.

4 major themes dominating global markets

Theme 1-passive management fund flows continue to crush active management

So far this year, about $39 billion has shifted into passive funds and $90 billion has shifted out of active funds. Many think that 80 percent of the market is now on autopilot. Passive investments control about 60 percent of equity assets, while quantitative funds — those relying on trend-following models instead of on fundamental research — now account for 20 percent of market share, according to estimates from J.P. Morgan.

“The pace of outflows from active is at a cycle high while the pace of passive equity inflows has bottomed and [is] beginning to reaccelerate,” Dubravko Lakos-Bujas, J.P. Morgan’s chief U.S. equity strategist, said in a note on late in June.

Theme 2-Large -cap growth stocks and S&P 500 stocks continues to dominate performance

In past letters I have talked about the widening spread in performance and valuations between large cap U.S. stocks and international markets. Large cap growth stocks now trade at close to 9x price to book (P/B) value compared to 1.5x P/B for emerging market stocks and 2.5x P/B for developed market stocks. 

The entire outperformance of emerging market stocks since 2003 has been erased

This might explain why the sell-off at the end of last year functioned as a correction to drawn-out U.S. outperformance, while this latest moment has seen emerging markets lag behind the S&P 500 even more. At this point, all the outperformance by emerging markets since 2003 has been canceled out – an extraordinary statistic given the speed of growth in much of the emerging world. 

(placeholder Vanguard growth vs. EEM emerging markets 5 year)

Theme 3 -Growth investing is crushing value investing

  1. S&P growth stock vs. value stock rallies above 1999 record spread
  2. I started my trading career in 1997 in the early innings of the Internet bubble. I never thought we would witness such a large spread between growth and value stocks again. I was wrong. Not only are we seeing a spread of historical proportions – but we are hearing many of the same themes that we heard in 1999. Twenty years ago, Goldman Sachs published an ill-timed piece about the death of value stocks and a Forbes article suggested for Warren Buffett should call it quits after 10 years of under-performance.

On December 7th, 1999, Barron’s published the infamous “What’s Wrong,Warren” cover eerily before the Nasdaq crashed 50% and Berkshire recovered years’ worth of underperformance.

The below graph plots the time period 6/30/98 through 2/29/00 for the Nasdaq where many dot-com and technology stocks traded, and the price of Berkshire Hathaway, Warren Buffett’s holding company, which consisted of value stocks:

S&P 500 Growth vs Value gets over the 2000 peak, twits notes.

S&P 500 Growth vs Value gets over the 2000 peak, twits note

20 years later “The Big Guy” is back on the cover of Barron’s as “CEO of the Year.”

Take a minute to review the chart below. How many Millennials are familiar with this chart? In my experience, Amazon means just two things to them–(1) that’s where they order almost everything in their lives and (2) the stock only goes up. 

1999-2000 Nasdaq and Amazon chart.

Theme 4-Demographics is destiny

Speaking of Millennials, we tend to be passionate believers in the power of demographic trends.  Consider these facts:

  • By the year 2020, eight of the top ten demographic cohorts will be under age 40 (Boomers will be fading away).
  • By the year 2030 the top 11 cohorts will be the youngest 11 cohorts.

There will be plenty of “gray hairs” walking around in 2020 and 2030, but the key for the economy is that the number of Americans in their prime working years is now increasing. If nothing else, this should be a positive trend for housing and the economy.

U.S. Demographics: Largest 5-year cohorts, and Ten most Common Ages in 2018

by Calculated Risk on 6/11/2019 11:59:00 AM


As shown above, the U.S. has the largest demographic group in history hitting its prime spending years. That makes me believe the next recession–like all previous economic slowdowns–will present great buying opportunity for stock investors. But make no mistake – I believe we will have a recession before reaping the full benefits of Millennial spending power.  If you doubt this macro trend, just scan some of the charts about student loan growth and urban apartment expansion. The “pig through the python” is coming and it may have a profound impact on our economy over the next two decades. There will be more on this trend in a future letter focused on demographics.

Beyond U.S. demographics, we have global population projections predicting the rise of Africa as Asian hyper-growth rolls over.

Future Population Growth.


After being historically bullish about stock pullbacks–including hosting a webinar at the beginning of this year [LINK] that the end of 2018 was a buying opportunity, not the start of recession, I believe we are now in a more precarious situation. The inverted yield curve should not be ignored, and our economy appears to be running out of qualified workers as the jobless rate settles below 4 percent. Amazingly we have not experienced inflation despite such a historically low unemployment rate, so the stock market continues to rise.

Sure, stocks are on the pricey side, but I don’t believe it means the market is on the brink of crashing. I wouldn’t consider this to be a bubble when you consider how low interest rates and low inflation are. Now is not the time to give up on a diversified portfolio. The S&P is expensive versus other options and we should temper our expectations for equity returns over the next half decade as stocks will likely face new headwinds.

Final thoughts: Prepare for the years ahead

I’d like to reiterate the advice from my Q1 letter:

• Stick to your plan. Investing is a psychology game, not an IQ game. Do not get emotional, have a plan.

• Prepare for lower but acceptable returns.

• Mentally prepare for a recession size drawdown in equities, possibly 30-40%

• Get aggressive when stocks are on sale.

• Ignore the headlines and doomsayers.

 • Ignore politics as elections approach.

• Don’t leverage up now. Opportunities will likely present themselves in the near future to use your debt/margin in a more efficient manner.

Fortis Wealth 1st Quarter Letter 2018

Technology Faces Its Machivellian Moment

Tech stocks have been letting the good times roll for five years

Good Times Roll – The Cars

Let the good times roll
Let them knock you around
Let the good times roll
Let them make you a clown
Let them leave you up in the air
Let them brush your rock and roll hair


  • Despite the headlines, technology sector remained the top performing sector in Q1 2018.

  • Is the tech sector expensive, or just FAANG stocks?

  • The volatility we’ve experienced in 2018 is NOT abnormal from a historical perspective.

  • Sector rotation to defensive companies has not yet happened.


Remember Sonny the Boss in the movie “A Bronx Tale”? A big fan of Machiavelli, Sonny asks the ultimate Machiavellian question: “Is it better to be loved or feared?”

Sonny made his choice in the movie, as all of us must, and it depends on your circumstances. To my way of thinking, in Sonny’s line of work (organized crime), it is much more important to be feared. Sometimes you can be both loved AND feared, but only for a short period of time. Eventually the single dominant characteristic (loved or feared) will surface.

The just-completed NCAA Men’s Basketball Tournament was a great example of a team that was loved then feared. Loyola of Chicago, a private Catholic University rarely mentioned among the nation’s elite college basketball teams, knocked off one heavy favorite after another on an unlikely

run to the national semifinals. The Ramblers captured hearts of sports fans everywhere with an undersized roster of humble, selfless players including two lightly recruited guards that have played together since 3rd grade.

Then there was Loyola’s telegenic spiritual advisor, Sister Jean, a 98-year-old wheelchair-bound nun who confounded the basketball experts and lit up the national TV cameras after each game with her smile, moxie and bold predictions. Last weekend, on Easter Eve, the Ramblers had joined big blue chips Michigan, Villanova and Kansas in the national semi-finals, marking the school’s first appearance in the Final Four since 1963.

Ultimately, the Ramblers didn’t win it all, but as but as they busted their way through the brackets, the “Cinderella” team wasn’t just lucky. It used steel tip boots and a killer instinct to sink fear into the hearts of much better known, better funded opponents. In short, the Ramblers were easy to love—unless you had to play them.

The way I see it, in today’s stock market, the technology sector is going through the same tug of war between being feared and being loved. As Sonny’s character says: “It’s nice to be both; but it’s very difficult.”

The technology sector has led this epic nine-year bull market in concert with consumer discretionary stocks. Tech stocks now account for a whopping 25 percent of the S&P index weighting. (source:

More importantly, the five largest technology and internet stocks account for more than 14 percent of the S&P 500 index weighting. Investors are struggling to reconcile their love of tech products (and earnings) with their fear of tech’s lofty valuations. That’s the conundrum. Is the entire tech sector overvalued or just the dominant FAANG stocks (Facebook, Apple, Amazon, Netflix and Google)?


Source : Daily Forex


Source: Semper Augustus Investments Group LLC


The volatility we experienced in the year’s first quarter may have been unsettling, but many investors are out of practice feeling nervous. In my opinion, the volatility was actually quite normal in light of the exceptionally calm year we had in 2017. At the end of the day, market returns come down to earnings. Nearly 90 percent of tech stocks beat their revenue estimates in the 4th quarter of 2017—tops among all sectors. In fact, it was the best quarter for tech stocks in five years and CIO expectations for tech spending were at the highest level in 14 years, according to a Sanford Bernstein survey of chief information officers.

Is it better to be loved or feared?  For technology stocks, 2018 will tell the story.

It appears based on technology stock revenues and earnings, the near term looks positive for the sector. But it seems that the same Wall Street pundits and analysts touting international economic growth are the ones tilting negative on tech valuation. That’s further puzzling since the tech sector gets over 50 percent of its revenues from international markets.


Tech valuations do not appear to be significantly richer than the overall S&P 500 index.


I started my career in 1997 on a trading desk during the height of the Internet bubble. My firm was a small-cap tech-oriented shop, so my introduction to the world of trading was a technology-stock version of baptism by fire. Regular readers of this letter know I don’t like making predictions, but I have to get this one off my chest: If you ask me, today’s market is absolutely nothing like the 1999 bubble!

I remember those exuberant dot-com days like they were yesterday. Once, while waiting for my car to be serviced in 1998, the mechanics kept running off the shop floor to check their diagnostic computers in the main office. At first, I feared my car was in big trouble, but I later learned the mechanics were using the office computers to day-trade stocks.

Back then we heard stories of landscapers routinely leaving their jobs to day-trade at 100-to-1 intraday leverage. And today, we believe these same investing amateurs, having been burned, keep all their money at Vanguard and swear by passive indexing.

Granted, tech sector valuations are not cheap today, but I find it’s tough to support an argument that we’re in bubble territory. The P/E for technology stocks is 19-times next year’s earnings. Compare that to a 17.7x multiple for the S&P 500 index and a 54x multiple for tech stocks during the March 2000 bubble. Even after a torrid start in 2018, tech stocks trade on par with their 20-year price-to-book ratios relative to the S&P 500. And based on price-to-earnings ratios, tech stocks carry a valuation that is 22 percent below their 20-year historical average relative to the S&P 500.


This article in MarketWatch helps put tech valuations into perspective


         PICTURE 1 (1983-2000)                       PICTURE 2 (2000-2017)



The debate over offense vs. defense is not just for basketball in March. The most offense-minded sector (technology) has pulled off one of the biggest blowouts in market history relative to the defensive-minded consumer staples sector. As the chart below shows, over the past half-decade, Tech has outpaced Consumer Staples by a whopping margin of 158 percent to 33 percent—reminds me of a UCLA basketball score from the late 1960s and early 1970s.


The chart below shows the tech sector in red and the consumer staples sector in blue.

See Eddy Elfenbein, Crossing Wall Street for more


See sector leadership history below when the yield curve inverts



When the next bear market hits, it’s likely defensive sectors will take leadership and new sectors will spearhead the next bull market. Markets are an exercise in rotation. The way I see it, there is always a bull market somewhere–timing and emotion is what matters most.  When will value stocks take leadership over growth stocks?  Will international outperform domestic over the next three years?  When is the next sector leadership rotation?  Will techfall from the top sectors?


So, is it better to be loved or to be feared?  The jury’s still out on that question, but as Sonny the Boss would say, “It’s tough to be both.”

Technology stocks may be over-loved at the moment, but paralyzing fear is what prevented most investors from buying them when they were at bargain basement prices a decade ago. Right now, it seems tech valuations are high, and investors are following classic behavioral finance patterns:

They’re “following the herd.” For instance, in the first quarter of 2018, tech had the highest sector inflows since 2000.

We live in a global technology driven world in which many jobs and tasks, not to mention employees, are being replaced by technology. This has led many people to question whether the five dominant FAANG stocks have become modern day monopolies.  The conundrum is that the rest of the tech sector aside from FAANG stocks is expensive–but not in a 1999 Bubble kind of way. How do you rectify this in a world that’s being rapidly divided into learners and non-learners?  Especially when the learners are technology driven.

Is the tech leadership real or an illusion?  We shall see in 2018 if the good times continue to roll.

Good Times Roll – The Cars

If the illusion is real
Let them give you a ride
If they got thunder appeal
Let them be on your side

Let them leave you up in the air
Let them brush your rock and roll hair
Let the good times roll
Won’t you let the good times roll-oll
Let the good times roll

Let the good times roll
Won’t you let the good times roll
Well let the good times roll
Let ’em roll (good times roll)













It’s the End of the World as We Know It

It’s Not Over, but the Fat Lady is Stretching in the Warm up Room

It’s the end of the world as we know it
It’s the end of the world as we know it
It’s the end of the world as we know it and I feel fine

REM “It’s the End of the World”

Key Takeaways

  • Professional managers feel pressure to increase risk in order to produce outsized returns in a one-way market that seems to go only up.
  • There is still some steam left in this bull market, but a downturn will eventually occur when earnings are exhausted.
  • Tech will not be immune to the downturn.
  • The good news is that we will face a good-old fashioned correction—not a crisis—and we always come out of recessions stronger than before.

It ain’t over till (or until) the fat lady sings is a colloquialism which is often used as a proverb. Based on the dramatic conclusion of an Opera, in which a plus-size female singer belts out the finales, this expression means you should not presume to know the final outcome of an event that is still in progress. More specifically, “It’s not over until the fat lady sings” is used when a situation is (or appears to be) nearing its conclusion. It cautions against assuming that the current state of an event is irreversible and clearly determines how or when the event will end.


Self-driving cars, robotics, and artificial intelligence would have anyone believe it’s the end of the world as we know it. Of course, every new technology in history promises to eliminate human jobs and cause massive disruption. But, here we are in the golden age of technology with record lows in the U.S. unemployment rate. The more things change, the more they stay the same and the business cycle is always a great example of history repeating itself.

Understand this; it’s not the end of the world! Heck, it’s not even close to 1999 or 2008, but it is starting to get interesting. I have written a series of articles over the past two years explaining that we were not yet close to the top of a bubble for a host of reasons.  First and foremost it was due to the lack of the usual public euphoria that ends bull markets. In my April 2017 piece, we discussed the phases of a bull market and how the “mania phase” had not even begun as money continued to pour into bonds. It also explained how you would be more likely to hear about the magic of indexing around the water cooler than get tips about Bitcoin.

Well in a short seven-month span, the mania phase has begun. It’s not yet close to the velocity of past bubbles, but we are seeing evidence that animal spirits are kicking in. No worries–this is America and the animal spirit is what drives the unemployment rate to 4 percent.  Let’s take another quick look at the phases of a bull market. Are we hitting “greed”, “delusion” and “new paradigm” phases?  That’s not clear, but we are finally showing some signs of greed after the extremely long investment hangover that followed the 2008 financial crisis.

The three stages of a bull market…We are sliding up the line in the mania phase.

  1. Accumulation stage: The start of the uptrend when informed investors enter the market.
  2. Public participation phase (the longest phase): An improving economy and better earnings create more participation from the investing public.
  3. Excess Phase:When it seems-only good times ahead, the last of the buyers enter the market.

Source: Investopedia

In my last three articles I argued that the bull would continue.

Infatuation – Bubble Spotters are Obsessed with Another Debt Crisis-Sept. 2017

Tiny Bubbles – July 2017

If It Looks Like a Top, Feels Like a Top, and Sounds Like a Top then It’s Probably a Top….Nah! It Ain’t Over Til It’s Over.  April 2017

Signs of euphoria are emerging

The first things I look for are: retail investors going all in, and managers going all in?  Are they? Check and check.

Retail investors go all in

Household sentiment about the stock market is back at historic highs, but the average retail investor is not yet fully invested. Again we are close to the top, but not quite.

Unfortunately most retail investors are terrible stock market timers. Throughout history, they consistently buy at the top and sell at the bottom so tracking sentiment as well as dollar flows are a great contra-indicator.

Source: Balyasny Asset Management (BAM)

U.S. retail investors say that today is the best time ever to invest in the stock market (see chart below).

Let us know if you would like to add a colleague to this distribution list. Torsten Sløk

Professional investors go all in

Paradoxically, the only people who are worse market timers than retail investors are professional investors.  Mutual funds are under tremendous pressure to produce quarterly returns or else lose assets. This forces them to chase benchmarks at exactly the wrong time, as equity volatility collapses and even small amounts of cash become too big of a performance drag to bear.   As the mutual fund industry experiences a collapse in fees, this anxiety over cash drag produces a misguided “all-in” mentality. Fund managers now see the risk of not participating in the bull market as even greater than getting burned by staying in—even if hefty market valuations are causing severe stomach pain.   See below, mutual fund cash below 1999 and 2007.

As professional managers go all in, the tension ramps up on them to increase risk as the only way to produce outsized returns in a one-way market that seems to only go up. If the S&P 500 is cranking new highs every other day, the portfolio manager elects to increase risk in order to differentiate his or her fund from benchmarks that charge .03 basis points (bps). We have now exceed the level of professional manager risk taking last seen in 2007 and 1999.

Equity Markets: The Merrill Lynch Fund Manager Survey shows excessive risk-taking at levels we haven’t seen before. This is precisely the sort of thing that makes Federal Reserve officials uneasy.

Source: BofAML, @jessefelder; Further reading

A new world order sector comes to fruition

Historically when managers increase risk, a fresh sector or sub-sector emerges as the new world order–think Nifty-Fifty stocks of the 1960s, biotech in the 1980s and internet stocks in the 1990s.  This particular run as usual is different in its own way. We have a group of four stocks called FANG (Facebook, Amazon, Netflix and Google) that is now bigger than the entire S&P energy sector.

On top of the new technology side of the equation, we live in a world that is increasingly invested passively in index funds and exchange trade funds (ETFs). These passive vehicles are buying billions of dollars a day of FANG stocks with no end in sight—at least until the next recession.

There is no question that FANG stocks are leaders of a new technology world order that’s built around robotics, artificial intelligence, autonomous vehicles, online shopping and learning. But, at what valuations?   Every bubble ends in its own way, but what they have in common is floating higher around new theories that seem to justify higher prices.

Is a small group getting its own futures market the sign of a top?  

FANG + Futures start trading today, based on the NYSE FANG+ index which includes 10 highly liquid stocks that represent the top innovators across today’s tech and internet/media companies. The index’s underlying composition is equally weighted across all stocks, thus providing a unique performance benchmark that allows for a more value-driven approach to investing.

FANG stocks bigger than S&P energy sector.

FANG stocks are certainly not pretender stocks like or Webvan that we had in the dot-com crash of 2000, but like most of life, tech earnings are indeed cyclical. The broad economy moves in cycles. Periods of peak performance are followed by a downturn, then a trough of low activity. As the cycle turns downward, risk happens faster due to proliferation of ETFs that make it easier to trade in and out of indexes, especially in expensive sectors and sub-sectors.

The chart below compares the long-term earnings stream of the S&P 500® Information Technology sector (white line) with that of the S&P 500® Consumer Staples sector (blue line). At the peak of a cycle (like today?) the Technology sector looks to be superior to Consumer Staples. However, the Technology sector’s growth quickly loses momentum during profits recessions. Tech looks to be a superior grower compared to Consumer Staples only toward the peak of a cycle.

Richard Bernstein of Richard Bernstein Advisors has more about this trend.

At Fortis, we see no clear signs of a recession yet. As long as earnings keep rising, the cycle will continue, but eventually it will be exhausted and a downturn will ensue. Tech is not immune to that slump as the 27-year chart (above) shows.

A New World Order Asset Class Comes into Fruition

Greed and rampant speculation are as American as apple pie.

More money has been raised in completely unregulated initial coin offerings so far this year than the global IPO market. I am not an expert on crypto- currencies, but it is safe to say that animal spirits are flowing when an unregulated market goes up 900 percent in one year with a 30-percent correction per quarter.

The Bitcoin run has drawn comparisons to the dot-com bubble of the late 1990s. While the sentiment and underlying forces of both bubbles may be similar, their performance is a different story.

1Mauldin Economics

At the beginning of 2015, Bitcoin was trading just above $300. In early November of this year, the Bitcoin price topped $7,600. That translates to returns north of 2,200-percent in just 1,041 trading days.

By comparison, the NASDAQ index was up 391-percent after 1,041 trading days from the start of 1995. Returns on the NASDAQ index at the time peaked just shy of 1,100-percent after 1,326 trading days.

Bitcoin’s run has far outpaced the tech bubble, and its returns have already dwarfed the dot-com mania.

Fortis is not in the game of predicting future outcomes, but bitcoin is the most vivid investment example of the mania phase beginning, 2200% move in 1000 trading days and everyone I know is asking me about bitcoin.

We have some room to run

The American population is just starting to embrace this bull market and equity exposure has not hit previous highs of 60 to 65-percent. This may be partly due to Boomers hitting retirement and electing for more conservative portfolios than they had during their working years. But, a more likely explanation is that a fair number of citizens still need to throw in the towel before the next correction or recession.


To be clear, I am not expecting anything like the 2008 financial crisis or even the 1999 tech bubble. The next setback will be a good old fashion recession. The good news is that America always comes out of the recessions in dramatic fashion. The even better news is that we have demographics on our side this time around. We are about to embark on a massive Millennial household formation cycle that will lead us back to prosperity no matter what kinds of short-term setbacks we encounter.

Bull markets usually last 10 to 15 years and this one is only five to seven years old, but we have some corrections to face in the meantime. After a 15-year decline of 35 to 44 year olds in the U.S., we are about to see a massive surge that will make up a significant share of household formation that could top 48 million by 2030. Younger families will buy homes, have children, invest and consume.

In Philadelphia, the fat lady is Kate Smith and the song is “God Bless America.”

The market’s response to a crisis is a “God Bless America” moment

As I wrote in previous articles, the S&P 500 has had 12 corrections of at least 20-percent in the last 70 years and the market is up 15,000 percent during that time frame. The cycle will repeat itself as it always does, but we will start a new cycle led by positive demographics and a new technology revolution.  It’s the end of the world as we know it, but the economy and markets will remain cyclical.

It’s the end of the world as we know it
It’s the end of the world as we know it
It’s the end of the world as we know it and I feel fine (time I had some time alone)



Matthew Topley is the Chief Investment Officer of Fortis Wealth, 1045 First Avenue, King of Prussia, PA 19406  (610) 313-0910 and author of the View from the Top blog.

Fortis Advisors, LLC is a registered investment adviser with the Securities and Exchange Commission. You can read more about the Fortis team at

To the extent that content includes references to securities, those references do not constitute an offer or solicitation to buy, sell or hold such security as information is provided for educational purposes only. Articles should not be considered investment advice and the information contain within should not be relied upon in assessing whether or not to invest in any securities or asset classes mentioned. Articles have been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Securities discussed may not be suitable for all investors. Please keep in mind that a company’s past financial performance, including the performance of its share price, does not guarantee future results.

Material compiled by Fortis is based on publically available data at the time of compilation. Fortis makes no warranties or representation of any kind relating to the accuracy, completeness or timeliness of the data and shall not have liability for any damages of any kind relating to the use such data.

Material for market review represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results.

Indices that may be included herein are unmanaged indices and one cannot directly invest in an index. Index returns do not reflect the impact of any management fees, transaction costs or expenses. The index information included herein is for illustrative purposes only.

The trademarks and service marks contained herein are the property of their respective owners.

If It Looks Like a Top, Feels Like a Top, and Sounds Like a Top then It’s Probably a Top….Nah! It Ain’t Over Til It’s Over.


Key Takeaways

  • Statistically speaking, the market is overdue for a correction—but skipping out too early can cost you plenty.
  • We constantly watch for five indicators of a recession–none is flashing red yet.
  • There are 3 phases of a bull market and 4 stages in a bubble. Read on to see where we are.


The most hated bull market in history is trying to keep the love alive. When I started my career on the trading desk in 1998, believe it or not, everyone on Wall Street watched a PBS show called “Wall Street Week.” For 32 years, the show was hosted by Louis Rukeyser, an eternal bull and one of the first Wall Street media celebrities. Rukeyser’s guests considered it a badge of honor to be interviewed by Rukeyser, who was a combination of Oprah Winfrey and David Letterman–with hair like Donald Trump’s.
Rukeyser kept a dozen or so Wall Street soothsayers (aka his “elves”) in his stable. But the elves started going bearish in 1996 before the “rip your face off” rally during the final phase of internet bubble that ended in 2000. Rukeyser sent the elves back to the North Pole but his show lasted another six years before cable and the internet rendered “Wall Street Week” a footnote in capitalistic history. Sadly, Rukeyser died not a few years after going off the air. If nothing else, he learned a valuable lesson about Wall Street: Timing the market can make you rich or send you to the gulag. Over the years the gulag has become an overcrowded prison.

Louis Rukeyser

The three stages of a bull market.

  1. Accumulation stage: The start of the uptrend when informed investors enter the market.
  2. Public participation phase (the longest phase): An improving economy and better earnings create more participation from the investing public.
  3. Excess Phase: When it seems-only good times ahead, the last of the buyers enter the market.


Are we in the Mania Phase?

There is sound evidence that the U.S. stock market has hit the higher levels of fundamental valuations. For example, the forward P/E of the S&P 500 index is now higher than its 5-year, 10-year and 20-year averages. What’s more, the Shiller CAPE (Cyclically Adjusted P/E) ratio is above 30, and the Buffet Indicator (market cap divided by GDP) is two standard deviations above the mean. I have attached explanations of all three with this article. It’s safe to say fundamentals are not cheap, but fundamentals are not market timing devices.

At market tops, bullish sentiment is nearly unanimous. Wall Street analysts, company CEOs and the investment public tend to adopt a new euphoric view of the future with the belief there will be a perpetually rising stock market.

This level of blind optimism is best monitored by money flows and sentiment. In times like these, the investing public pours into stocks, leaving bonds, commodities and real estate by the wayside as exhilaration about the equity markets becomes the topic of all conversations. If that’s the case, then all I can say is, “Houston we have a problem!”

However, recent surveys show that bearish sentiment among retail investors is at the highest level in over a year. Further, money managers are holding high levels of cash, and flows are still going into bonds. So, it appears the great migration out of bonds and into stocks has not unfolded yet.

Source: J.P. Morgan Asset Management

Taxable Bond Flows Highest Since 2010. Stock Market Bubble?

How about Wall Street? Has euphoria set in?

On Wall Street, the so-called “sell side” is represented by people in the financial industry who sell products such as stocks and bonds. The “buy side” is made up of institutional investors including pension funds and insurance firms.

Based on data like the chart below, it appears Wall Street is still in a “Barely Bullish” phase–hardly “Exhilarated.” Compare today to the levels of extreme bullishness in 2000 and 2007. It’s not even close.

How about IPO Elation? Surely if we are in a bubble, then the IPO market should be going gangbusters. Yikes! Here is a list of big name IPOs with performance.

The table below lists the first-day performance and subsequent performance of high profile IPOs from recent years.


How about retail investor sentiment? At Fortis, we believe the markets are a psychology game, not an IQ game. According to the CNN Fear and Greed Index of investor emotion, the retail public remains fearful, not euphoric. Sentiment drives flows, hence we expect continued consumption of bonds which are in the midst of a 35 year bull market.

Correction or Bear Market?

Normally, the S&P 500 has at least three corrections per year of at least 5 percent. In 88 out the past 89 years, there has been at least one 5-percent correction and in 67 of the past 89 years there has been at least one 10-percent correction. Based on this evidence, the market is overdue for a correction and we are heading into the traditional “Sell in May” seasonal months in which the probability of a pullback increases. Sure, a correction is possible, but a recession or credit crisis is much less likely.

Yes, we have pockets of credit risk in the form of sub-prime car loans, student loans and emerging market debt, but it’s nothing like 2008. Per capita household debt levels have essentially moved sideways for a decade, because of the substantial reduction in mortgage debt. Regarding a recession, none of the five indicators that we monitor at Fortis is flashing red yet, but when conditions change, we will change, too. That’s because real damage is done to unprotected portfolios during recessions–when stock market corrections average 30 percent.

If a recession is not imminent, being early may be quite painful. My friend Josh Brown at Reformed Broker summarizes the dangers of sitting out the end of a bull market (see below).

Table 3 shows the performance of stocks 24-months prior to a historic bull market peak, as well as 12 months and 6 months prior. It’s painful to miss the end of these things. If you sat out the markets12 months prior to a historic peak, you would miss out, on average, of a 25% gain. Even missing out the last 6 months prior to a peak would cost you, on average, a 26% gain.

Source: The Reformed Broker


There is a new thesis in play that argues with so much money flowing into passive indexes and ETFs, the investing world has changed forever. Sure, the number of retail investors buying individual stocks has fallen to the single digits and even institutional investors are starting to invest in a passive manner. But, is this market cycle really different from all the ones before it? Politicians change, management teams change and tax rules change, but human emotion never changes. When we invest, we are not playing an IQ game; we are playing a psychology game. The new passive paradigm is indeed real, but to believe this changes euphoric bubble tops is to adopt the most dangerous sentence in investing -“This time is different.” The bubble investor doesn’t enter the market until they feel so much pain inside that they finish with many tears to cry.

It Ain’t Over Till It’s Over.

Did we give up
But we always worked things out
And all my doubts and fear
Kept me wondering
If I’d always, always be in love
So many tears I’ve cried
So much pain inside
But baby it ain’t over ’til it’s over


To learn more, see below:

Forward P/E definition

 Buffet indicator Market Cap to GDP discussion

 Shiller Cape Ratio Definition


God May Have Blessed America, But Investing Only in the U.S. May be an “American Prayer”

American Prayer-U2

“I want to know healing An American prayer I want to know the meaning Of American prayer I want to believe in  American prayer But I can hear children screaming American prayer”


Is Money Moving Again to More Expensive Markets?

It looks like investors are buying expensive markets and selling cheap markets again. In my August post “Gimme Shelter,” I pointed out that money was flowing into an expensive fixed income market and out of a reasonably priced equity market. At the time, I observed that recency bias and negativity bias were leading investors to shift money “under the mattress” into traditionally safe bonds or cash. I cited a Wall Street Journal article reporting that investor demand for bond funds relative to stocks was at the highest level on record. According to the article, investors had poured $202 billion into global bond funds and withdrawn $57 billion from stocks. In just the U.S., China and Japan alone, a stunning $55 trillion was sitting idle in bank deposit accounts that were yielding essentially zero interest. “Never before in history have individual investors been so bearish on stocks when the stock market is at a record high,” I wrote.

 Since my August 2016 “Gimme Shelter” article The S&P +6.38% vs. AGG (bond index) -3.69%


Continue reading