Laszlo Birinyi, the stock sage who called the bull market, thinks people are ignoring a key driver that will keep the rally afloat.
When Laszlo Birinyi talks about the stock market, it's in your best interest to listen.
The legendary investor and president of Birinyi Associates has repeatedly nailed his predictions since the start of the bull market. He was one of the first analysts to recommend buying after markets bottomed in March 2009 and has remained a stock enthusiast as the S&P 500 has nearly quadrupled.
Most recently, he said in the middle of the year that the benchmark would hit 2,500 by the end of September. Right on cue, the S&P 500 is sitting within 5 points of that target after hitting a series of new highs this week.
Perhaps even more impressive than Birinyi nailing the start and subsequent gyrations of the eight-year bull market has been his continued willingness to make bold forecasts in the face of pessimism. In December 2008, in the throes of the financial crisis, he wrote that stocks were near a bottom.
Need more evidence of his prescience? No problem:
In an interview with Business Insider, Birinyi laid out his arguments for the continuation of the bull market. He also poked holes in many of the most popular bearish stock arguments — from high valuations to record-low volatility to breadth. He doesn't buy any of it. Nor is he a fan of exchange-traded funds, one of the world's fastest-growing investment vehicles.
Birinyi is instead focused on something he thinks is going widely unappreciated: the massive amount of cash sloshing around in the market.
This interview has been edited for clarity and length.
Joe Ciolli: What specific elements do you think are pushing the market higher? We hear a lot about earnings growth and relatively subdued geopolitical tensions. What is shaping your fundamental picture?
Laszlo Birinyi: I don't think people appreciate how much cash there is in today's market. It seems like everything is just an excuse to put that cash to work, whether it's a tax bill or economics or [President Donald Trump's chief economic adviser Gary] Cohn not leaving the White House — those are all just excuses. The bond market is unsettled, and you've removed some of the stock-market concerns of the last couple years, most notably earnings. People are feeling a little more confident and willing to invest, and they have the cash to do it.
The other issue is that while the averages are lackluster, there's a lot of trading money focused on individual stocks. The S&P may not have moved 1% or 2% in however many days, but the reality is that stocks are having really good days. You have a lot of individual stock volatility, which reflects the fact that people have the funds and they're looking for vehicles in which to manifest those funds. They're using single stocks as the vehicles, not broad asset classes such as emerging markets or gold or commodities. The critical ingredient in the market is cash.
We also focus on the fact that many of the negative arguments really don't hold water.
Yes, they're high, but since 2009 we've become enchanted by what everyone calls Shiller's Cape. We went back to the 1980s and found that in an entire 10-year span, there was only one mention. This isn't a law that's been in existence ever since the New York Stock Exchange has been around. We weren't even aware of it in the last cycle. My argument against the whole thing is: It's never gotten you in the market. We can catalog a bunch of articles that show no one's ever said to buy. It's always been "The market's overpriced," "The market's expensive," "The market's high," but no one's ever said buy. In July 2009, there were some articles saying that according to some valuation measures, the market was fully valued. In July 2009! To me, something that's never told me to buy is not something I'm going to listen to when deciding when to sell.
Stock market breadth (a measure of how widely distributed gains are):
There are 10-12 different versions of breadth. There are all kinds of ways to look at it, and the bears find the one that looks least compelling. One of the problems I've always had with technicians is that they come up with a viewpoint and then they come up with data to support it. To me, a lot of these concerns have been with us a long time.
The interesting thing about earnings this quarter is that while they've maybe not been quite up to expectations, what's making things difficult is that people are now looking at earnings as just the first cut. And then they say, "Well, what about revenue?" And after earnings and revenue, they look at some other factor. You have a stock like Netflix where the earnings were so-so but the subscription rate was really good. You have this volatility because there's money sloshing around, waiting to do something. All of a sudden you look at Netflix and it's up 10%.
With a stock like Priceline that has a so-so report but the outlook isn't that exciting, so everyone jumps on the downside. You have this tremendous individual stock volatility. The fact that overall earnings are good has made people a little more confident about the market, but it's also made things more difficult because earnings are now just the first cut. But net-net, it's a positive.
Ciolli: In the past, you've expressed caution around what you describe as "irrational exuberance." Are we seeing that right now, and how has that view shaped your firm's forecasts?
Birinyi: We're really not seeing it. As for what we've done, we reached our objectives for the first six months at the end of June. So we wrote at the end of June that we would be buying the September 29 S&P $250 call — in other words, we were looking for 2,500 by the end of September. And this was not just a comment; we actually put money on the table. We're now at that level. [Note: The index closed at a record high of 2,498.37 on Wednesday, the day before this interview.] There's absolutely no change in our view that the market will continue higher.
Once the market goes above 2,500 — which hasn't happened yet — we will be coming up with a new target, because we think this is a market that's ideal for taking small steps rather than looking out 12-18 months. There are too many moving parts, such as North Korea, which we're not going to try to factor into our process.
Ciolli: What is your take on the current low-volatility environment? It often gets characterized as a ticking time bomb. Does it worry you or signal anything in particular?
Birinyi: Like so many things, that is a characteristic of a market. When people say to me that the market hasn't had a 1% run in a certain number of days, that tells me just that. It doesn't tell me anything about tomorrow or what's going to happen.
The VIX isn't the fear index — it's a measure of potential volatility in either direction. Yet for some reason, people have glommed onto the idea that if the VIX spikes, the market's going to go down. No, when the VIX spikes, it means the market could go either up or down a lot. If you go back to the bottom in 2009, the VIX was telling you that there were going to be another two years of a bear market. It tells you about volatility, not direction. To me, it's just another vehicle. It's totally meaningless with regard to the future of the market. In an uninteresting market, people have found that this is something you can play. It seems like VIX ETFs and [exchange-traded notes] are a quick way to lose money.
Ciolli: What about ETFs, which have seen a huge increase in popularity and are often blamed for sapping the market of volatility?
Birinyi: We looked at ETFs. I don't think people really appreciate or understand a lot of the ETFs. Do you know what the fifth-biggest stock in the technology ETF is? A telephone company. When you say you want to buy tech, are you OK buying telephones? We looked, and if you took the eight biggest ETFs and bought them in January, you were up approximately 10% end of year. If you bought the biggest stock in those ETFs, you're up 25%. That should be the story instead of all these new ideas.
If you go back in time, there's always been three guys from MIT that could come up with a better mousetrap. They were doing the same thing 10-12 years ago. Today we have bigger computers, and the algorithms are more complicated, but it's not new. You go out, you buy individual stocks where you understand that business and you understand what you're doing.
If you bought some sort of VIX vehicle, I'm not sure you could understand if it did what you thought it would. Are you really getting paid for being correct? I'm not sure. It's fine for people with the background to do it, but not for 99% of the population.
To me, all these shortcuts and easy ways to get into the market are very, very expensive. Without a way to quantify it, I'd almost be willing to bet you a very large amount of money that the dealers have made more money on the VIX than the customers. To me, this is all noise that floats because there's nothing else going on. People want to have something to talk about.
Ciolli: What's your view on how political developments are affecting the market now? Immediately after the election, a lot of the stock-market gains were attributed to policy optimism, but that correlation seems to have lessened. What's the current dynamic?
Birinyi: It's having some influence in the sense that it's given people a reason to reassess their circumstances and what they're doing. But I don't think it's having a direct influence in terms of what you buy and sell. If you look at the stocks that responded immediately after the election, they've not held up. While I'm willing to concede that there was a Trump bump, there aren't Trump stocks. The market, in so many ways, has suggested that the alleged direct beneficiaries of the new administration really aren't benefiting. Investors, including myself, jumped on these ideas, and many lost some money doing so.
All politics are local. When you have developments that aren't likely to directly affect most individuals, they're really not going to be that concerned. Healthcare did affect most individuals, and the town meetings were pretty raucous. But when you talk about the wall and things like that, it won't affect 99% of people, so they're not focused on it. Bank regulation isn't going to affect most people, so they're not going to try and do anything about it. Trump has gotten people out of their chairs and doing something, but I don't think it's been in the stocks that you'd most closely associate with his politics.
Ciolli: Overall, what's the best piece of advice you can give to investors right now?
Birinyi: We have a cliche here that we say to our customers, and it's from a Wendy's commercial: Where's the beef? We see so many articles about how there's going to be a correction, but out of all the forecasts, I've never seen one that outright says to sell. No one comes out and says, "There's going to be a correction — short the S&P." It's all "The market is scary" or "We could have a downdraft," but at the end of the day, the question remains: Has there been a transaction?
Having sat on a trading desk on Wall Street, where you live and die by what you do, to me this is just noise. In the last eight years, there was only one instance that I recall where a strategist came out and said, "There's going to be a correction, and you should sell the S&P." And we did! It didn't work out — we lost a little bit of money. And that was OK.
We like situations where someone gives something tangible, where someone is accountable. That's why, when we put up our forecast in June, we said we were buying those September 29 S&P $250 calls. We had skin in the game, and I think customers appreciate that. We may be wrong, but we're not going to sit there and give people a forecast we're not following ourselves. As somebody once said, don't tell me it's going to rain — tell me to buy an umbrella.