The US economy grew at 4.1% in the second quarter of this year. That’s the June quarter just ended, of course. And it’s the first report on that quarter’s growth, subject to revisions. 2018’s first quarter growth was upped a little bit, too, this morning. To put today’s economic growth number into perspective, a quarter’s growth that powerful hasn’t visited the USA since 2014, and that one was a fluke, amid national governmental policy that largely demonized corporate success. Back then, our government betters advising us assured us, many times, that 2% was both good and likely the most we were going to get going forward in the “new normal” US economy. Redistribution, please remember, is very, very costly.
Well, surprise! For all his profound faults, his raging ego, his brittle personality, his history of serial philandering, and his bizarre comments and tweets, Donald Trump has proved to be a genius in much of his policy setting.
So where do we go from here?
Well before I even speculate, the market’s reaction today to this news seems to yearn for the good old days of 2% growth, along with promises for more and bigger redistribution, more regulation, and higher taxes.
Markets, you must understand, are very astute in the long run, can be very stupid in the short run.
It is also worth reminding all of us, from time to time, that almost any description and every prediction about the future of the U.S. Economy and its stock market involves a gross oversimplification of an extraordinarily complex system.
Pundits, commentators and portfolio managers – people like me, in other words – often write a “market outlook,” implying they can forecast how stocks are likely to do over the next few months or so, or until it is time for the next market outlook.
Yet, no one knows what the market is going to do over any time period that would be of interest and value to the typical investor. The operate word in that last sentence is “knows:” no one knows.
Still, the most common question I get from many friends as well as readers of this blog is “what’s your outlook for the market?” I then dutifully provide one, not because I know or even have a strong opinion, but because I am asked.
This reminds me of an economist named Ken Arrow who was asked during World War II to provide a long range weather forecast for an upcoming military campaign, which would involve land, sea, and air operations. I’m not sure why an economist was asked about weather, but Ken said a forecast of the requested length was worthless because no one knew how to forecast the weather for a week out, let alone the length of time his superiors wanted. He was told to provide it anyway; and when he asked why, the answer was “for planning purposes.” So, I suppose, that also goes for market forecasts. That is not to say there are not some useful things that can be said about the market at any point in time, but they are mostly observations about what is going on NOW, not meaningful predictions about what the future holds, which is what’s most important – yet unknowable – to any investor.
However, peeking under the covers, what is going on now is that the bull market that began in March 2009 continues. Yippee! The S&P 500 Index was up a modest 2.6% in the first six months of 2018. The market had a 10% correction after its peak on January 26, but then resumed its advance. The path of least resistance since 2009 persists, if irregularly, higher and remains so.
For sure, there have been issues over the last nine-and-a-half years that looked ready to kill the market – there always will be, please know – the most serious of which was the euro crisis of 2011, which many feared would lead to a repeat of the crisis of 2008, but which was averted. Then, too, we all may remember the first six weeks of 2016 which saw the worst start for the S&P in its history – in its HISTORY! – as big worries about China and Russia, coupled with collapsing oil prices and worries about the pace of the Federal Reserve’s tightening and the upcoming presidential election tanked stocks to the tune of some 10.3%. But the market recovered as it became clear those fears were just that. Today, the market is up some 50% from the swoon it took at the start of 2016.
I hope you and your long-term retirement account caught that lovely ride up.
Now, following the least volatile, smoothest ride up in US markets ever in 2017, 2018 is more normal. That is, it is more volatile, but the direction has been, as is usually the case – 2/3rds of the time – most years, higher. And as usual, there is no shortage of issues to threaten the market’s continuing advance. Trump’s wall between the U.S. and Mexico is small potatoes compared to the towering wall of worry the market has been climbing since March 2009, which has kept investors – amazingly, to me – selling their stocks to pour money into…(drum roll, please) … bonds. Yes, BONDS! This year so far, investors have pulled $40 billion out of stocks and put $80 billion into bonds.
What on earth are these poor people thinking!? Come to think of it, I don’t think they are thinking.
As one set of worries prove unfounded, as the media pound away at Trump and predict impeachment for treason or terminal depravity or idiocy, another set of world problems arises to be confronted. And so far, the problems seem to be getting handled. If there were few or no “what abouts?” – such as, what about the tariffs and the possible trade war, what about the flattening yield curve, what about high valuations, what about earnings growth peaking, what about the Fed tightening, what about oil and gasoline prices going up, what about the dollar’s strength and emerging markets’ weakness, what about North Korea, or Russia, or China – to name only a few, then stocks would be so expensive they would have nowhere to go but down once some new “what abouts” arose. This bull market will end one day for sure, and it will end the way all bull markets end: when the economy rolls over and earnings decline and unemployment rises, or when stocks get too expensive relative to their earnings (up 20% this quarter alone) or the returns available in other assets.
But that ain’t yet.
And no one knows when any of these bull-market-ending events will occur, although, again, they assuredly will occur again (and again) at some point.
What is the case now is that the economy and US companies’ earnings growth are both strong, as is dividend growth (8% year over year), returns on capital and margins, and inflation is low (but ticking higher). Stocks are not yet expensive relative to bonds, the latter of which are very expensive relative to stocks. Yet people still jump from stocks perceiving that bonds and CDs and other interest-oriented “safer” investments are the place to be before the world and America go to hell in a hand basket.
You can do that, too. Sell your stocks to buy, say, a CD. But I’m not traveling on that train. At least not yet.
For now, the path of least resistance for U.S. stocks remains higher.
God bless you all.