Cautiously Bullish

Many years ago, when learning the craft, I heard an old, experienced portfolio manager say that the best trades you would make were the ones that made you the queasiest when you hit the buy button. Nothing could more accurately sum up what I think is our reality today.

It is hard to get excited about stocks after the longest expansion in history1. Especially knowing that most of the rise in the last year was from p/e multiple expansion, not earnings growth2. And of course, there was the massive upswing in the market since the lows of December 2018.

Taken by itself without context, 2019’s S&P 500 total return was stellar at 31.5%. Yet, if we look at the last 2 years of performance, we see that the market is up 25.7%3. Or rather simply looking at the 2 years of returns they are roughly 12% compounded per annum, or within an approximate range of what stocks have averaged over very long data sets. It seems the 2019 returns and the multiple expansion phenomenon was merely a reversion to the mean trade to make up for the worst catastrophic December since the Great Depression4.

They say bull markets climb a wall of worry, and this one certainly has and continues to. One of the most enjoyable things about being a Portfolio Manager is getting to talk to very smart, very talented and very savvy investors and clients. It strikes me the sentiment towards the markets is so negative in my conversations that we cannot help but to feel cautiously bullish. Bull markets die on euphoria, not on skepticism.

The market’s current momentum and ability to continue its rise in the face of negative news flow, is in our opinion, a likely bullish sign. The environment reminds me of the mid 1990’s, when the market’s continual rise was trumpeted as unsustainable with prices and multiples too high. The then mature stock market rally was labeled “irrational exuberance” by Federal Reserve Chair Alan Greenspan in 19965. The market had fantastic returns in the years immediately following, rising 20.26% in 1996, 31.01% in 1997, 26.67% in 1998 and 19.53% in 19996.

One of the other great enjoyments we have in this business is all the charts and data that we get to parse through. It lets us collect cool charts and fun factoids that can support our case, even if they are neither predictive nor truly correlated. For example, we have not had a decline in a year following mid-term elections since 19467. Suffice it to say, it is harder, in our opinion, to build a negative case than a bullish case when looking at historical market data. However, we acknowledge that the markets may not care about our research in choosing their next direction.

It has been my career long observation that one of the greatest fallacies in investment discussions, especially emanating from popular media and talking heads, is predicting the economy’s direction as an indicator of how we should invest. Yet, we believe the greatest leading indicator of the economy has been the stock market. The common wisdom has always reversed the process, as it would seem so intrinsically sound or obvious, plus it makes great news.

We find ourselves entering the new decade, hopeful, and cautiously bullish. We are currently finding value and actionable ideas in Europe and Emerging Markets, as well as in overlooked stocks and sectors in the US. We believe the US dollar’s recent weakness8 may in fact mark the beginning of a trend. We see the continued success of disruptors and have tried to invest our portfolio in the beneficiaries of this era of accelerating disruption and technological change.

John Cheshire
January 8, 2020


  2. 1/3/20
  3. Credit Suisse- Return Decomposition Monthly January 2020
  7. 1/3/20
  8. 1/3/20

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