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Stocks rallied into year end on renewed optimism about a ‘Phase One’ US/China trade deal, less risk of an economic downturn in 2020 and continued support from global central bankers. The advance has come on very low volume, suggesting that it is being driven by a lack of sellers as opposed to a new wave of buying. Investors are most likely loathe to take profits and pay the capital gains taxes this year, while many managers like to show a more fully-invested portfolio at year end and don’t want to be seen as selling too early in a rising market. Not to try to ‘rain on this parade’, but the more skeptical among us (including a weekend article from Bloomberg Business) point out that “never before have we seen such a rally in risk assets so devoid of fundamentals and built on such leverage.” The 2019 stock market rally has been driven entirely by increased valuation as stocks as opposed to earnings growth, which was basically non-existent. Like much of the past decade, once again the gains were supported by excessively ‘easy’ money conditions, particularly in the U.S. where the Fed has once again been on a tear with the re-expansion of their balance sheet and a 10% annualized expansion in the money supply in the last quarter. Given that economic growth has been slowing along with real business spending and the demand for loans, the excess liquidity created by these central banks has nowhere to go except into financial assets. This is very apparent when looking at commercial bank balance sheets, where their holdings of U.S. treasury securities has risen by over 17% this year. The investing public is also buying into the euphoria, as evidenced by the most recent survey of AAII (44% bulls from American Association of Individual Investors) as are investment advisors. Investors Intelligence Survey has gone from 5% net bearish one year ago (30% bulls/35% bears) to 40% net bullish today (57% bulls/17% bears). Stock investors are less prepared for a downturn when it finally does arrive. Cash levels are at record lows in both private client accounts as well as institutional and mutual funds. The bottom line on market sentiment is that the CNN Fear-Greed Index (range of 0-100) now stands at over 90, versus under 10 one year ago. Meanwhile, the VIX Index, the traditional measure of investor complacency, sits near an all-time low. This bull market might continue to surprise us on the upside, but all of the typical signposts we’ve seen at the end of any prior market cycles seem to be firmly in place. (more…)