Running of the Bears?

Evidently, bears just became an endangered species-Wall Street bears, that is. Some notable long-time pessimists are changing their tune, leading some to wonder if the "capitulation of the bears"^[i] typical of euphoric peaks is starting. It's a fair question, though the fact folks are thinking about this is itself a sign sentiment is in check. Moreover, all it takes is some simple math to see these newly minted bulls aren't exactly running wild with optimism.

In a full-fledged capitulation, you usually see some long-time permabears throw in the towel and jump on the super-bull bandwagon. They're tired of being wrong year after year as stocks continually defy their "look out below!" warnings of doom and gloom. They're tired of being made fun of by an increasingly optimistic punditry. So they give up and start forecasting 30% up years with the rest of them-a pretty fair sign sentiment is out of whack.

This isn't what's happening today. Though some experts are sunnier, plenty of doom and gloomers remain, and they aren't yet the laughing stock of Wall Street. They're journalists' go-to sources for quotes to fill articles highlighting potential risks or threats, and they command reverence.

Plus, those jumping on the bullish bandwagon haven't exactly had a Damascene conversion from bear to bull. It might seem that way when you see strategists bumping their S&P 500 Price Index targets from 1850 to 2100-that's 250 points higher! That's a lot! But don't fall for the "big numbers" trap. For one, the S&P started this year at 1848, so these "bears" called for a flat year-not bearish, just blah-ish. Their revised forecasts are also pretty ho-hum. One now thinks the S&P will hit 2100 in 12 months-a piddling 5% move. The "prominent Wall Street Bear" now calling for the S&P to hit 2025 at year-end is predicting a 2.5% gain. Another supposedly "formerly bearish" analyst now expects the S&P to rise 15% by year-end, which might sound overly optimistic until you remember how quickly markets can move-that forecast wouldn't be much different than what we saw in 2006 and 2010 (coincidently, like this year, both midterm election years).

The same logic applies to a widely cited "bullish" call for S&P 500 to hit 3000. Another really big number! But scale is key. The actual call-S&P to 3000 by 2020-is a gain of 50% over six years, which is decidedly lower than the 193.9% the S&P has gained over the five and a half years since this bull began.^[ii] In this light, it's more of the same new-normal lackluster return forecasting so popular throughout this bull. Heck, we could even have a bear market sometime in the next six years and still have the S&P at or above 3000 by 2020. This is not outlandishly bullish by any stretch.

If the media is interpreting a few slightly more optimistic forecasts as a deadly capitulation, it's a sign we aren't near that euphoric peak yet. A sign it's time to take a hard look, in our view, is when the celebrity-status bears who've warned of a crash since 2009-those who've warned the Fed, buybacks or some other salve is the only thing preventing the day of reckoning-ditch the doom and prophesy boom. As long aspieceslikethis are just a small sample of the bearish chorus, we probably aren't there yet.