The bulls believe that a global reflationary cycle is underway, and will likely drive the markets up towards the 2007 highs. The most bullish believe the U.S. economy will de-couple from Europe’s woes and will continue accelerating, Chinese growth will pick up on easier policy, and even Europe is past the worst of its mild recession. For investors holding this view, high beta stocks and other risk assets are the road to outperformance over the cyclical horizon.
The bears are still concerned that Europe will again rear its head, that the emerging markets will need many more rate cuts to gain traction, and that the leading evidence still has the U.S. hanging on the edge of a contraction. For the bears, this latest rally was just a bear market burst that will soon trap the bulls. This camp is advising investors to stay defensive for the time being.
With camps being so divided between exciting gains and discouraging losses, the uncertain are not sure where the markets are going. They recognize that both the bulls and the bears have good points. They recognize that the zero percent world of quantitative easing is so unusual that it’s very hard to dig in on either side of the equation. The uncertain advocate stays somewhere close to benchmark due to the unusual lack of clarity. If the uncertain are correct, perhaps the alternative to a bull or bear trend is a market that trades in a range and essentially goes nowhere for some time.
We currently sit in the uncertain camp, as contradictory evidence swirls around us on a daily basis and makes the bull and bear camp look a lot like a coin flip. A coin flip is equivalent to a low conviction forecast, and a low conviction forecast tells us it’s time to play the game at a neutral stance.
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