To Infinity and Beyond?

The Market is a slow moving freight train and will not be denied. On Monday November 18, 2013, the Dow Jones Industrials and the S&P 500, at least temporarily, eclipsed round milestones of 16,000 and 1,800, respectively. The bulls general explanations for the Market's strength is stimulus from the Fed. But not all bulls are created equal. Some are more bullish than others.

The Explanations 

The Mildly Bullish Case

At least one group of bulls believes that because of the Fed's policies the Market will continue to move higher through the end of the year. They surmise that as long as the Fed is in place the Market will have a floor, a put, so to speak. This group is not wildly bullish because of this line of thinking. In fact, at least part of this group is somewhat apprehensive about the bull case based on continued Fed intervention. There is an acknowledgement of the weakness in the foundation of this type of bullish scenario. If Fed support is your only basis for a bull case then it stands to reason that you equally believe the Market can fall if that support is removed, thus fear of 'tapering'.

The Medium Bullish Case

The vast majority of bulls fall in to this camp. The line of thinking here is that along with Fed support providing a floor for stock values true economic fundamentals underpin the stock market's move higher. These bulls point to incremental improvements in leading indicators, improving durable goods figures, lower jobless claims, low interest rates along with subdued inflation. This group likes to point to historical valuation multiples to represent this market as not overvalued, and in fact, suggest at the worst, this market is fairly valued. Their claim is that improving economic fundamentals will allow for expanding multiples, even with GDP growth of 1.50% to 2.0%. This group's fears are that record profit margins are not sustainable, corporate financial engineering (issuing debt to buy back stock and pay dividends) will fall off as interest rates rise and cash balances fall, and that earnings growth will suffer as a result hampering further equity gains. (These fears are shared by the folks in the 'Mildly Bullish Case'.

The Ultra or Uber Bullish Case

As with any philosophy there always exists an extreme tail group. This group is proudly headed by Wharton Business School professor Jeremy Siegel, who we all love because of his congenial nature and wildly overzealous and unabashed optimism. How could you not embrace Professor Siegel? Well, one reason might be that his forecasts may not account enough for some level of risk in the Market. "Where are the risks in the Market, Professor Siegel? Ya, I don't see any either???" Some level of sobriety when speaking about the Market's potential would make some folks feel better. But we digress. This group's claim to fame is that people and investors are inherently driven by greed. That is not a condemnation, it is merely an observation. Most of us want to accumulate wealth in order to maintain a certain standard of living and comfort for ourselves as well as our children. Therefore, the natural inclination is for us to want to be optimistic about the future and it's prospects. That is the bread and butter of this group. Their bullish case encompasses all of the bullish factors above but goes a step or two beyond. This group not only writes off fears of tapering but insists the Fed is likely to increase stimulus therefore creating an even higher floor for equity values. As for valuations? The Market is grossly undervalued at these multiples and has more room to expand. As for earnings and their prospects going forward? American ingenuity and corporations are on the cusp of great things. The untapped potential is ready to explode. This group's fear(s)? Fear? What fear?

Conclusion

Even the Ultra Bullish Group has got a leg to stand on, regardless of what the Market does going forward. The nature of man is to move forward. Optimism is a natural human sentiment and is reflected in all markets. The natural course of all sustainable markets is to move higher (inflation being one elemental reason). Do markets get ahead of themselves and 'correct'? Yes, they do. But the bulls will always have this natural human element to support them. For this reason, they have the easier slog in the investing world than do the bears. The bears are 'swimming against the current' in a matter of speaking, by taking a position that is not the natural predilection of human nature. In a way, the Market really is on a path to infinity and beyond. The 'rub' is the timing, and each investors is finite. Viewed from an infinite perspective, the Market can and probably will always rise. However, because our investing timelines are captured in snapshots within the Market's larger timeline, and  because of declines within the rising trend, investors can mistime the Market and suffer losses. Therefore, gains are not always guaranteed despite the natural tendency to the upside. This fact exposes the recklessness of the Ultra Bullish Group. There is, indeed, a time to be cautious, if not, downright bearish. So, to infinity and beyond? Yes, but with some caveats.