There is a saying that markets exist to make the greatest number of people wrong most of the time. Any money manager will admit the stock market seems to confound consensus forecasts—if not his own—with unwelcome regularity. Perhaps it is a small mercy today that we have no shortage of data to know the direction of the crowd and its collective views.

If the consensus is a contrary indicator, then investors’ current sentiment is good news. This week The Wall Street Journal reported investors have pulled over $135 billion out of stock mutual funds and exchange traded funds this year despite a strong year for stocks.  Investors are fleeing—but this is nothing new. For half the calendar years of the now-ten year bull market, investors have sold stocks and put in money in just about anything else: bonds (with lower and lower yields), cash equivalents (with no yield), private equity real estate, art, Bitcoin, you name it. 

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In other words, money is scared. The data seem to corroborate what we hear from clients and financial advisors alike. We have our worries, too, and we’ve been defensive with investments. The consensus is not wrong in its worries; the trade wars alone present a clear and present danger. It’s a binary proposition: a favorable resolution to trade will lead to more bullish sentiment, and escalation of tariffs will do the opposite. Binary bets are not appetizing—asymmetrical bets are, as in, “ Heads I win, tails I don’t lose much.” Meanwhile, markets continue to melt up, perhaps in large part due to stocks’ dividends and growth attributes gaining a higher intrinsic value as interest rates collapse and growth becomes more scarce globally. Witness the chart below: investors have earned more dividends each year since the financial crisis.  They have also earned a second source of returns—a greater amount—in the form of stock buybacks. At roughly $500 billion, corporations were the biggest buyers of stocks last year, stepping in when investors have stepped out. Buybacks should exceed $470 billion this year.

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Source: Strategas Research Partners

Yields from stocks versus Treasurys are also historically favorable. Today 52% of S&P 500 stocks have a yield greater than the 10-year Treasury yield (which is about 1.8% currently). This yield difference is actually understated for taxable investors as dividends are taxed at a lower rate than ordinary income.

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Source: Strategas Research Partners

Election: The Resilience of Joe Biden

Is it a coincidence that the latest leg up in stocks has coincided with Elizabeth Warren’s slide in the polls? Despite poor debate performances, gaffes, health concerns, and allegations levied against his son, Joe Biden has regained the lead according to markets. The latest odds, based on actual contracts (bets) people make with real money, show Biden with a 28% chance of getting the nomination. That’s not terribly high odds, but it is seven percentage points above second place Bernie Sanders at 21%. Arguably, these kinds of indicators are more reliable than those based on people answering landline phones.

Lastly, odds say impeachment is coming. The futures market prices impeachment at 92% odds. However, there’s an almost equal probability Trump survives a trial by the Senate.

Happy Holidays to you and yours.