It's a 'Bohemian Rhapsody' Stock Market: Nothing Really Matters

"Is this the real life? Is this just fantasy?
Caught in a landslide, no escape from reality
Open your eyes, look up to the skies and see
I'm just a poor boy, I need no sympathy
Because I'm easy come, easy go, little high, little low
Any way the wind blows doesn't really matter to me, to me."

- Queen, "Bohemian Rhapsody"

Numerous events, historically market-unfriendly in nature, have failed to hurt impact the markets. These events include:
* A clear lack of momentum for the Trump agenda

* A series of disappointing high-frequency economic data, including Friday's very weak May employment report

* A 15-month low in the Citigroup U.S. Economic Surprise Index

* A growing rift in the Arab world, seen in Saudi Arabia, Egypt, Bahrain and the United Arab Emirates severing diplomatic ties with Qatar amid accusation that Qatar supports terrorism and is stabilizing the region.

"Mama, just killed a man,
Put a gun against his head,
Pulled my trigger, now he's dead.
Mama, life had just begun,
But now I've gone and thrown it all away."

And, on Saturday another major terrorist attack occurred in London -- the third terrorist act on English soil in three months. (See my Question #1 near the end of this morning's missive).

"Nothing really matters,
Anyone can see,
Nothing really matters,
Nothing really matters to me."

Not only did stocks not retreat in the face of all these headwinds, but the S&P 500 Index, the Dow Jones Industrials and the Nasdaq all reached all-time highs, as did cumulative breadth (both all-issue and common stock only) and seven of the nine major industry groups did so as well.

All this happened on lower volume, a negatively trending U.S. dollar, surprisingly lower interest rates and a declining price in the crude oil. No matter!

2017 has been a theme-dominated market influenced by the aforementioned currency, interest rate and commodities trends, and investment performance this year has been determined by getting the theme correct.

Thus far the rally has been concentrated in a handful of stocks and in a category of stocks. Specifically, "growth" sectors have had an 11 percentage point advantage over "value" in 2017. The growth-dominated large-cap Nasdaq 100 is up 21% compared to a 1.7% increase for small caps. Computer stocks are up 24% while bank stocks are down 6.5%. Utilities are up 11% compared to energy, which is down 11.5%.

"The rear view mirror is always clearer than the windshield."
--Warren Buffett

This all tells us what has happened and not what will happen.

It remains my view that, to some measure, the failure of the markets to react to the numerous and accumulating headwinds is importantly a function of the disproportionate role of ETFs (passive investing is on a big roll) and the dominance of quant strategies (volatility trending and risk parity) that have caused stock prices to move.
This helps to explain the wide divergence in themes and group performance in 2017.

Stated simply, ETFs and strategies that worship at the altar of price momentum accentuate these trends.
But, when investors become agnostic to fundamentals and events -- as I believe is the case today -- and all dips are always bought and stock prices rise in a regular fashion, it seems to me that risk is being significantly underpriced.

I am sticking with my concerns comprised in these eight questions I ask myself every morning:

*       In a paperless and cloudy world, are investors and citizens as safe as the markets assume we are?

*       In a flat, networked and interconnected world, is it even possible for America to be an "oasis of prosperity" and a driver or engine of global economic growth?

*      With the G-8's geopolitical coordination at an all-time low, how slow and inept will the reaction be if the wheels do come off?

Remember when the big argument in favor of President Trump was that he was a dealmaker who knew how to get things done? That was when he was doing real estate deals. Now he has to deal with 535 other politically partisan legislators in Congress -- on their own real estate turf.

Does the administration have the depth of experience, understand the extent of the legwork and organization required for passing legislation or have a coherent idea or shared vision of what it wants to achieve and what problems it means to solve?

If President Trump can't easily put through a health care package, what does that mean for more difficult regulatory reforms and his tax- and fiscal-policy agenda?

President Trump took credit for the stock market's advance since his election victory. Will he take responsibility for a correction? And is it a slippery slope for an administration to use the S&P 500 as a barometer of success? And is a pro-business and anti-domestic programs (in education, the arts, etc.) agenda going to benefit those in the lower and middle class (largely his base) who have suffered the most over the last decade?

With the specialist system now extinct, when ETFs sell, who will buy?

Finally, it is important to remember this investment dictum that we should never forget -- that is, what is obvious rarely stays most profitable for long.

I don't think "this time it is different."

Be alert to events and an abrupt change in trend -- it could happen at any time.

The data (and events) will matta.