Hey Bear

This is not to cheerlead or say we couldn't see a correction but virtually every piece of data worth considering points to a slow but steady march higher.

Personal income, up.
Savings rates, up.
Foundational technology shifts, happening.
Debt/income ratios, lower.
Earnings growth vs market gains, up.

Consider three things...

Margin Debt

I'm seeing a lot of people point to margin debt and say "Margin debt is so high. We've seen this before!"

Looks bad, right? How could a crash not happen? Clearly people have borrowed too much and that debt is going to unwind.

Or is it?

As a percent of S&P 500 market cap margin debt is lower than it's been since 2006. Now we could refuse to leave the bear camp and say that this has potential to trigger a big market correction if the market really came unwound. But why would it...

Corporate Earnings

The S&P 500 is up 14.4% this year. Earnings are up 19.5%.

What does that mean? Multiples are actually shrinking. I'll say it again, multiple expansion actually contributed a -5.3% to prices. Tell that to the news media.

You know what happened? Time passed and the market didn't keep rocketing higher. If we had kept on the 2020 pace we could talk about being in a bubble. But it didn't so we don't have to.

Are things cheap? They're not cheap but they're not overvalued either. Sometimes you sit in the lukewarm, fair value middle.

Consumer Debt

It'd be better to see credit card and other delinquencies lower but note everything housing related at or near 18 year lows.

We'll need to see mortgage and HELOC (home equity line of credit) delinquencies tick up to the 2.5-4% range before we need to worry heavily about a true recession.

Up next we have the total debt balance...

Up, but like we said with margin debt we have to ask what it's going up in relation to. If personal income is remaining flat debt would be a problem. So is personal income growth flat?

Definitely not. And it's only getting stronger in the current labor market.

Here's commentary from the New York Fed:

Mortgage balances shown on consumer credit reports increased by $117 billion in the first quarter of 2021, and stood at $10.16 trillion at the end of March.

Balances on home equity lines of credit (HELOC) saw a $14 billion decline, the 17th consecutive decrease since 2016Q4, bringing the outstanding balance to $335 billion.

Credit card balances declined in the first quarter, by $49 billion, a substantial drop and the second largest quarterly decline seen since the series began in 1999. Credit card balances are $157 billion lower than they had been at the end of 2019, consistent with both paydowns among borrowers and reduced consumption opportunities.

Auto loan balances increased by $8 billion in the first quarter.

Student loan balances increased by $29 billion. In total, non-housing balances declined by $18 billion, with increases in auto and student loans offset by the declining credit card balance, and are now $49 billion below the 2019Q4 level.

If it weren't for student loans (a tragedy) the debt picture would be incredible.

Fortunately there is a large wealth transfer coming from Boomers to Gen-Z and Millennials that will (eventually) offset it.

Summary

Margin debt is manageable as long as the market doesn't go into free fall. Earnings are growing rapidly. Consumer debt rates are below 20-year historical norms.

This is not to say we can't see a correction. But the idea that we're going to see a 30% bear market seems utterly absurd when we zoom out and look at the big picture. Even 20% seems highly unlikely given the household savings rate. Add the possibility that corporate earnings smash records in the next six months and multiples continue to fall. Who's to say--as we step into the Roaring 20's--that won't happen?

I'm happy taking the contrarian bet on this one and expect that we slow and steady grind higher. The risk reward is favorable given all measures that tend to indicate a looming problem.

People continuing to sing the doomsday song are offering opportunities to everyone looking at all the data and all sides of the picture.

As the canary in the coal mine I'll be keeping a close eye on debt delinquencies. That data would still take 3-4 months to accrue to something meaningful but if they start to accelerate higher we'll revisit this.

P.S.

If some major external event craters the markets we'll be in for a world of hurt because rates are already at zero and the government has fired all of it's bullets. Obviously, in that instance all bets are off and this analysis is probably worthless.