Blissfully Ignorant
If ignorance is bliss, Floridians must be the happiest people on earth.
Despite the threats presented by the tariff chaos and the defacto hostile takeover of Washington by Elmo Musk's Doge Boys, there are no signs of panic here. The local MSM news still focuses more on the weather than on those weightier issues.
Canadians here are few and far between, but the locals seem blissfully unaware of why. Despite my facetious "Celsius conversion" explanation, the Loonie's weakness still mystifies my Chicagoian neighbours. It shocked them to hear that U.S. trip cancellations by Canadians were more in response to Trump's denigration of our sovereignty than to any cost increases. They just don't get it.
But did you expect anything else, given the recency bias emanating from a decade of U.S. exceptionalism? And now that the Republicans have wrested control of the economy from the clutches of the DEI-crazed Dems, there is economic nirvana lying just ahead if you ask them. Don't worry if you fire 'surplus' workers whose job is to guarantee the safety of nuclear weapons or, more topically, air traffic safety; the future is bright! To make DJT's omelette, you gotta break a few eggs, no matter what they cost!
So, dear reader, when it comes to the stock market, park your brains at the door and join the ignorantly bullish ranks. Despite the decade's high levels of equity risk exposure reflected in asset allocation surveys, the bull market is still alive and well.
The S&P500 bull market narrative is premised on three beliefs:
The Fed is friendly.
The economy is strong.
Everything else is irrelevant.
Stop thinking critically. Don't expect any rebalancing to seamlessly transition to a more prudent world. The blissful ignorance currently displayed in the U.S. market should last a bit longer. You can fool all of the people sometimes. Call it 'animal spirits' if you want, but the madness of crowds often takes on a life of its own.
The plug variable for all this is valuation. An expensive market can stay expensive longer than you can stay out of it. It makes for a challenging benchmark to beat. I have seen this up close and personally. In 2001, I managed $5 billion of Canadian equities against a recklessly constructed index with a 35% weight to one highly over-valued stock - Nortel. Still, my pension fund clients, blissfully ignorant of the risk, tasked me to outperform that flawed benchmark. Institutionalized inertia 'forced' an overweight to a specific risk that defied all logic. Those hapless bureaucrats were duped by their own ignorance of the facts. In a global context, the U.S. market is the 'Nortel' of this cycle.
Thankfully, there are signs of a turn. European equities, a left-for-dead asset class, have outperformed the U.S. benchmark this year. Their financial sector has gone on a tear, a sure sign of a durable market recovery. And China has also perked up, shaking off the real estate bust. Investors are flooding in, chasing a tech rebound led by DeepSeek. Even President Xi has got the memo with his recent call to companies to 'show their talent.' It's more like, "Show me the money," but it takes the financial pressure off Bejing.
And even within the S&P500, there is a healthy rotation away from the old Magnificent Seven leadership this year. Compare the following pairs: Costco - Amazon, Intel - Nvidia, Thomson Reuters - Google. And there is outright selling in Tesla and Microsoft. Investors are desperate to diversify away from this waning theme.
A rally in economically sensitive equities, such as small caps and cyclicals, is still pending. The bank rally in the U.S. and Europe is possibly a precursor to this narrative. Banks have a cyclical component to their earnings, and that is driving some of the current optimism. A post-Ukraine War, the post-tariff environment in the back half of 2025 could help this rotation should the worst fears of Trumpian mercantilism be overdone and Putin backs down from its costly imperialistic dalliance. But don't bet on it just yet.
Commodities have preemptively bounced on the tariff fears but could subside after the hoarding effects run out of steam. The reinstatement of Russian supply - should it come - will dampen enthusiasm for energy and metals, possibly reversing their gains. It will take an extended and synchronized period of global expansion to tighten markets enough to see an actual bull market for commodities. I see that happening once the initial phase of geopolitical policy uncertainty is behind us.
What this means for the Canadian market is still a huge question mark. We have been left twisting in the wind - most of that coming out of Trump's mouth. There isn't a straightforward solution to Donny Despot's conundrum. He wants revenues from tariffs and cost-cutting to serve up the tax cuts he promised Congress in exchange for their fealty. Unfortunately, that won't generate enough and may even backfire as growth slows and unemployment rises. Jobless claims in Washington are already soaring.
But we must remember that he's also a victim of blissful ignorance, just like most Americans.
Risk Model: 4/5 - Risk On
So, how do I explain the extreme bearish reading in the AAII Sentiment chart below, given the markets are still stubbornly clinging to all-time highs? Again. I go back to ignorance. The excessive overownership of equities has built up almost by default. Due to the poor performance of real estate and fixed income over the past five years, people are more comfortable in equities than at any time in the last 20 years. They are nervously watching the Trumpian Tragedy play out and clutching their pearls - but they don't have any alternative. TINA is back in play. As long as the Fed plays nice and the earnings don't disappoint, they have no incentive to sell. You can't ignore that fact.
AAII Bull/Bear Ratio
