Comstock Partners, Inc.February 02, 2017
THIS BULLISH STOCK MARKET IS VERY LONG IN THE TOOTH
Weak Productivity Will Continue to Hinder the Growth of Our Economy
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.