Why One Smart Bear, David Rosenberg, Isn’t Very Bearish Today

Investors who were shocked by the downdraft in global equities over the last five days might want to look in the mirror.

Gluskin Sheff’s chief strategist, David Rosenberg, the former chief North American economist at Merrill Lynch urges clients not to “lose your cool.”

In this 9-plus year bull market, yesterday was the 20th time we saw a 3 percent plunge in the S&P 500. “The market still managed to surge 312 percent since March 2009,” Rosenberg writes.

From late January to early April of this year, the S&P 500 fell about 10 percent driven by—what else—rising bond yields and inflation pressures. Rosenberg notes that the world didn’t end but some investors became “more selective and discerning.”

Corrective phases, he adds, can last a few months and “require hefty doses of capitulation.” Right now, the bond market is transitioning from an unprecedented quantitative easing policy (low interest rates) to quantitative tightening, and disruptions are natural.

The stock market is playing catch-up with the Treasury market as it reappraises higher interest rates and lower tax policy. That’s what it should be doing. It doesn’t mean Rosenberg, who likes having 25 percent of client assets in cash, is turning bullish—just that many market participants have unrealistic expectations.

Yesterday, tech stocks experienced their worst day since August 2011. Leadership has been narrowing in this group of high flyers.   Among the mega-cap companies, it has been mainly Apple and Amazon that have carried the sector to new heights.

In Rosenberg’s view the tech-driven U.S. market averages, have been eroding for some time,. For much of 2018, there has already been a rolling bear market, as more than 65 percent of all stocks in the S&P have experienced at least a 10 percent correction. Others are enjoying their own individual bear markets.

Rosenberg points to the lagging financial sector as a canary in the coal mine. He believes financial institutions should be benefiting from rising rates. Instead, financial stocks peaked seven or eight months ago. Banks are “shedding assets” and some have laid off staff in their credit loan departments (can you say “Wells Fargo”).

Stunned investors might also want to look around the world.  Since its January peak, the International index has been down 15 percent this year.

Much of the current debate revolves around whether the U.S. economy is really as strong as Fed chairman Jay Powell and others like Larry Kudlow, chairman of the Council of Economic Advisors, believe it is.  GDP growth is strong, but the “bears” believe the trade “skirmishes” have prompted companies and individuals to accelerate purchases of various goods, setting the economy up for a slowdown early in 2019.  Yet I thought the negative “bears” saw the trade “wars” as the death nail to the present economy, or so they said on TV.

For his part, Powell has been explicitly clear about the Fed’s intention to normalize interest rates.  Why, because he believes the economy is doing quite well.