Category Archives: Quarterly Review

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

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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%


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