This bull
market is close to eight years old, and if it continues for another month, it
will be the second longest bull market in the history of the stock market. Being heavily invested in a stock market that
is historically just about the longest on record, and is also extremely over-valued,
has got to be dangerous. However, for some strange reason the sentiment of
investors in this stock market is just about as bullish as it can be. In fact, the Investors Intelligence, Market
Vane, January Michigan Sentiment, and VIX all show extreme bullishness to the
point that you would have to call it “euphoria”. And as you know, bullish markets often end when
“euphoria” begins.
Many
investors believe that the rationale of being fully invested is due to the low
interest rates, and even if the Fed raises rates, it will be a while before
they raise rates high enough to get to normalized levels (basically around the
inflation rate of 2%). However, you have
to keep in mind that the peg rate of the Fed over the next year ranges from 2%
to 2.5% or higher. Therefore, the one
fact that the bulls are leaning on is about to evaporate. Keep in mind that the Fed did say they would
raise rates 4 times in 2016, and they only raised rates once. We suspect strongly that they will raise
rates further, and faster, than in the past, especially since their two mandates
have reached the levels they set, and they don’t want to get too far behind the
curve.
Other
reasons that the U.S. investor’s sentiment is so high is because of President
Trump’s promise to lower taxes on individuals and corporations, roll back
regulations, repeal and replace Obama Care, and a push for the repatriation of
much of the $2.4 tn held abroad. He also
plans on starting a fiscal plan to invest $1 tn in infrastructure. This last promise also makes it much easier
for the Fed to raise rates much more rapidly since they have been asking for
this fiscal type of help for years. We,
however, don’t believe that President Trump will find it as easy to do as the other
promises he made-- such as pulling the TPP trade plan, pulling NAFTA, as well
as restructuring the key pipelines of Keystone and Dakota.
Another
unusual statistic that you might find interesting is the fact that every new
president since Dwight Eisenhower had to deal with a recession within 2 years
of taking the Presidency. It does seem
that President Trump should be concerned about that statistic and should worry
about running into a recession within the next two years.
Another
unusual statistic that should be of concern to the bulls, and new president, is
that in order to have a sustainable and strong economy there needs to be strong
productivity. In order to increase
productivity in an economy as large and as strong as ours, you need growth in
the labor force and substantial corporate investments combined to increase GDP
and productivity. There was a study done
by Morris Mark (founder of Mark Capital) that showed the screeching halt to
productivity and decreases in the labor force starting in the year 2000. He showed that because of increases in
productivity the U.S. economy grew over 3% from the years 1945 to the year
2000. Since 2000, our economy grew at
less than 2%. This is another statistic
that should be of concern to the bulls and President Trump.
Another study done by Ruchir Sharma, from Morgan
Stanley global research, corroborates with Mark about why our economy needs
increases in business investments and growth in the labor force. Sharma stated that the 8 year terms of
Presidents Ronald Reagan and Bill Clinton, produced a GDP growth rate of
between 3-4%. This growth rate was
produced because the “baby boomers” were entering the work force as business
investment was strong. However, this type
of growth is no longer plausible. We
will only grow at 2% or lower due to the demographics in our country. This is another fact that should worry the
bulls and President Trump. If President Trump
can accomplish many of the things that he ran on (such as tax reduction and
rollback of regulations) could help, but not solve, the large GDP growth spread
from the 80’s and 90’s (3-4%) and the present weak recovery of less than 2% that we are experiencing.