The 'three pillars' of this bull market are still in place: Morning Brief

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'Worriers are going to worry,' Bank of America says

Stocks hit record highs on Wednesday after the Fed's latest policy statement.

Stocks got crushed on Thursday as investors thought more about the Fed's latest policy statement.

In this kind of environment, it's hard to know what to believe.

But strategists at Bank of America led by Ajay Singh Kapur argue in a note published earlier this week that three factors are supporting the market now that should trump any worry du jour that spooks investors: liquidity, earnings growth, and breadth. Said another way, money is available, corporate fundamentals are improving, and more companies are doing better.

"We are in a bull market for equities, a view we have reiterated since March 2020," the firm writes.

"Yet, it seems easier to find skeptics, pessimists and worriers. There is always some reason or the other since the start of this bull market to complain/worry about. That's why bull markets climb a wall of worry. Bear markets crush confidence and trigger primordial survival modes in humans... The latest worry is rising bond yields and inflation. Interestingly, we have gone from all that skepticism about no V-shaped recovery straight to the opposite end — inflation! All within a few months. Worriers are going to worry." (Emphasis ours.)

Kapur and team include this great chart which shows the rise of global stocks over the last year alongside the concerning headlines that at each turn appeared to threaten the rally which began one year ago.


Over the last year, many developments related to the pandemic have appeared to put the market at risk. But so far, none of these has overcome the forces of liquidity, earnings growth, and broadening participation in the rally. (Source: Bank of America Global Research)

Of course, in hindsight it is always easier to say that some new development turned out to be nothing. And so Thursday's market's decline is absolutely worth noting: we will only know with hindsight whether this was the beginning of a rocky period for stocks or just another hiccup along a path up and to the right for stocks.

But we too often see investment commentary fall into one of two camps: everything matters or nothing matters.

There is, however, no absolute right answer. There can only be answers that are either more right or less right, depending on your investment goals, your time horizon, and your risk tolerance, among other factors.

But as far as Kapur and his team are concerned, these recent market jitters focused on a new market risk — in this case inflation — do not yet challenge any of the three core tenets of their bullish outlook.

"When free liquidity tightens, when the EPS growth cycle is enfeebled, and when the Tape breaks down, we will worry," the firm writes. "[Until] that time, stay bullish. Buy cyclicals, value, and start taking a fresh look at tech, already bruised by rising bond yield concerns."

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