One of my mentors, the late Dr. Bing Sung who managed the Harvard endowment fund, taught me that stock market rallies come in three distinct stages. It begins with capitulation followed by conviction then ultimately ending with euphoria.
He was very big on drawing historic parallels to show me the rationale behind his observations. As this was the late 80's, the recent Reagan years were a great example of how to read each stage. I find this as a classic case study for the recent market developments as much of the action seems similar in character to the early days of the Reagan administration.
The move in the market from the night of the last election until the recent move by the Federal Reserve last week can be considered the capitulation stage. It ended with a blow-off top which had all the characteristics of the end of a move. Many of the hard-core shorts finally threw in the proverbial towel and gave up on fighting the 'Trump Trade.'
For the last few months portfolio managers who found themselves sitting in too much cash or severely under invested kept waiting for the market to pull back, to no avail. Those that missed the signs in November finally came to the realization that they were wrong and bought stocks through the months of January and February. It was no longer a question of making money; it became a question of job security. A portfolio manager being left out of an equity market making new all-time highs day after day usually finds a direct path to the unemployment line.
This was a perfect example of capitulation; it took a couple of months and caused much pain and financial suffering to the bears. Now what?
Now it's time to look back and take another look at the Reagan years because of the similarities between the two administrations. Just as Reagan changed the course of the markets, so too do we see the Trump administration doing the very things necessary to refuel the economy, tax reform, regulatory overhaul and real fiscal stimulus.
