FYI | Apr 05 2017
By Peter Switzer, Switzer Super Report
Is it time to give up on optimism on stocks? Honestly, no!
Sometimes I feel like my old mate Kamahl where I ponder why “people can be so unkind?” And the irony is that my critics — both hard and soft — seem to be tough on me because of my optimism on stocks, which has been on the money since March 2009.
Over the weekend I had two semi-gracious digs at my pro-stocks view for 2017. In case you missed it, I’m happy to be rooting for stocks this year and while I suspect the good news for stock players will extend to 2018, I will be more on my guard in 12 months’ time.
Why? Try these:
- The interest rate rises in the USA over this year could easily change the share price to interest rate ratio and share player enthusiasm for stocks
- The Trump promises might be stymied by Congress and that would downgrade future economic growth guesses by those who aren’t worried by extended valuations for shares in the USA.
- The debt that has driven consumer positivity in the USA, which is now at a 16-year high, and that has propped up other economies around the world and helped beat both deflation and recession, could start acting as a negative on economic activity.
- China eventually does what pessimists have been predicting for years and loses economic momentum.
- Geo-political issues of a more serious kind could unsettle our economic and market complacency but I’m not too sure that these kinds of things have an enduring effect. That said, the break up of the Eurozone, if that happened in the not-too-distant future.
I could go on but you get my drift. Let’s face it, this stock market surge we’ve seen since 2009 will one day end in tears but the critical question is when?
When I pointed out to one of my critics, who referred to my “rosy views” (that I’ve been largely right on being long stocks since 2009), he did return fire that he agreed with me and that he enjoyed my Saturday report but picking turning points for markets is critically important as well.
Of course, he is right, but timing markets is fraught with danger.
Work done by JP Morgan Asset Management looked at timing versus time in the market.
“If an investor stayed fully invested in the S&P 500 from 1995 through 2014, they would have had a 9.85% annualized return. However, if trading resulted in them missing just the 10 best days during that same period, then those annualized returns would collapse to 6.1%.” (Business Insider)
Most of us need to spend time in the market, have a great investment strategy and stick to it, unless good sense says the strategy needs to be changed. For example, when you’re totally retired, your investments could be considerably different to when you embarked on your wealth-building journey.
Both my critics offered me two learned pieces from US experts that basically said “there is a clear and present danger” when it comes to the USA.
Economic crystal ball gazing by Morgan Stanley — which has been pretty negative for quite some time (if my recollections can be trusted) — thinks too much is being made of soft economic data and that hard data is telling a more negative picture for the US economy.
“Compare the New York Federal Reserve Bank’s current 1Q GDP tracking vs ours. FRBNY is currently tracking 1Q GDP at 3.0% versus us around 1%. The difference is larger than usual and is being driven by the fact that the New York Fed incorporates soft data into its tracking (attempting to tie it econometrically to GDP, a very hard thing to do, especially in real-time). Our method translates the incoming hard data into its GDP equivalent. Note that the Atlanta Fed’s GDPNow tracking also focuses on hard data and is currently tracking 1% for 1Q GDP.” (Morgan Stanley)
The pointy-head types at Morgan Stanley think the combined double whammy of fiscal and monetary policy is running out of bang.
This is how they put it: “Economic cycles do not last indefinitely. While fiscal and monetary policies can extend cycles by “pulling forward” future consumption, such actions create an eventual “void” that cannot be filled. In fact, there is mounting evidence the ‘event horizon’ may have been reached as seen through the lens of auto sales.”
So what? This is what Morgan Stanley argues: “While the media touts ‘record auto sales’, it is a far different story when compared to the increase in the population. With total sales only slightly eclipsing the previous record, given the increase in the population, this is not the victory the media wishes to make it sound. In fact, the current level of auto sales on a per capita basis is only back to where (sic) near the bottom of recessions with the exception of the “financial crisis.”
Similarly, scary analysis from US-based GMO concluded: “It appears that asset markets are priced as if secular stagnation were a certainty. Certainty is a particularly dangerous assumption when it comes to investing. In order to believe that asset market pricing makes sense, I think you need to hold any number of “impossible” (by which I mean at best improbable, and at worst truly impossible) things to be true.”
But wait, there’s more, which you might want to digest.
“This isn’t a mania in that sense. We aren’t seeing the insane behaviour that we saw during episodes like the Japanese land and equity bubble of the late 1980s, or the TMT bubble of the late 90s, at least not at the micro level. However, investors shouldn’t forget that the S&P 500 currently stands at a Shiller P/E of just over 28x – the third highest in history. The only two times that level was surpassed occurred in 1929 and in the run-up to the TMT bubble.” (TMT is technology, media and telecom and refers to the dotcom bust.)
But wait, there is a reason not to be too stressed about all this and that’s if economic growth conforms with the views of the likes of the Federal Reserve, the IMF, the RBA and lots of other economists out there.
As an economist, I’ve always valued the Quantity Theory of Money canvassed by the likes of Milton Friedman, which says MV=PQ. This says the money supply times the velocity of the money going around the economy will equal GDP, which is output (Q) times the price level.
Milton argued that money directly affects prices, output, real GDP and employment in the economy. Meanwhile, Keynesian economists use the same equation to argue that changes in the money supply directly affect interest rates, and through it indirectly income, employment and output in the economy.
Now I don’t want to side with either group but simply argue that the money thrown at the world economies after the GFC has to lead to GDP increases. Until recently, the V was slow because people were scared and cautious after the GFC and we see a bit of this here. We weren’t borrowing, except for housing and even that didn’t spike until 2013, so the velocity of money was slower than usual. Europe is the same but even more scared but the Yanks are starting to loosen up.
I will watch the US and Wall Street carefully and there’s a lot of pressure on President Trump to deliver. If he fails and US economic growth drops off, then stock prices will turnaround and fall.
I’m not a market timer but that won’t stop me warning you when I’m getting worried. I suspect 2017 will bring volatility but 2018 will be the testing time for the economic experiment called Trumponomics.
Donnie has to make an economic difference or these nervous Nellies and scare merchants might end up being right sooner than I’d like.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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