Market Optimists vs. Pessimists

I follow the market outlooks of a select group of investors that oversee billions of dollars at their respective firms. I can’t recall such a divergence of opinions on what’s in store next for the markets.

In the optimist camp, you will find Jamie Dimon, the CEO of JPMorgan Chase. He says, “President Trump’s economic agenda has ignited US business and consumer confidence and he expects at least some of the administration’s proposals to be enacted. It seems like he’s woken up the animal spirits.” Warren Buffett somewhat agrees and says we are not in bubble territory. Jeffrey Gundlach, known on Wall Street as the “Bond King,” believes inflationary pressures are increasing as well as business confidence, which will translate into a stock market that will “grind higher.” Hedge-fund billionaire David Tepper says it is hard to bet against a rally in stocks that have been underpinned by President Donald Trump’s three-pronged campaign promises of deregulation, tax cuts and increased infrastructure spending.

In the pessimist camp, you will find investment legend Jack Bogle, who has historically been the eternal optimist, but he now believes that the market may be rallying on hopes for economic improvement, but the long-term growth outlook doesn’t look so sunny. He doesn’t feel super confident and that you should expect much lower future returns. An even bigger pessimist is BlackRock’s CEO Larry Fink, who is warning that there are dark shadows and risks to this Trump rally. Bob Doll at Nuveen writes that investors may be too optimistic about the political and earnings environments.

There are not many optimists for bonds. Bill Gross says another credit crisis could be just around the corner. Dan Fuss, vice chairman of Loomis Sayles and one of the world’s longest-serving fund managers, is often referred to as “the Warren Buffett of bonds.” He is more cautious on bonds than any other time since the 1970s, as political uncertainties cloud an otherwise solid economic outlook.

Who is going to be correct?

Warren Buffett, of course. Why? He has built his fortune so that his wealth will compound no matter what the economic backdrop or whichever president is in office. He doesn’t believe Trump will make America great again because he has made a fortune already betting that America is great. When a reporter asked whether he believed America needed to be made great again, Buffett nearly jumped out of his chair: “We are great! We are great!”

His portfolio is diversified across businesses, stocks, farmland, preferred bonds, fixed income securities, and cash. He maintains an emergency fund of 20% in cash, and concentrates on companies that pay him dividends through free cash flows and not debt. If the pessimists are correct, he will not be impacted as much because he has cash to buy the dip. He actually made much of his fortune while the pessimists were patting themselves on their backs. If the optimists are correct, his portfolio will continue to grow through dividends, inflation, and earnings growth.

While these legendary investors have divergent views on stocks, they have all been warning on the overvaluation in bonds. The 10-year Treasury yields rose 9 straight days, which was the longest streak of losses since April 1974.

Your guess is as good as mine if this trend continues or if the optimists will be ultimately be proven correct. While I listen to the wide range of opinions of these investment guru’s, I believe that Buffett’s timeless advice applies to any market – diversify in companies that have competitive advantages with low debt, high dividends, buybacks, and high cash balances. This is how I’m helping my clients manage their wealth in this high risk and high return market.

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