Summary: Although the US major stock markets are at or near all-time highs, the economic data signals continued US and global growth. My viewpoint is that we are still in the early stages of what could be a multi-year growth cycle.
Here’s some detail on my thought process:
If you listen to the talking heads on the business news channels it is likely that you will come away thinking that the market is overbought and on the verge of another crash reminiscent of 2000-2003 or 2008. I’m also hearing the same thing—the markets are too high—then they talk about something like ‘valuation’. Granted, it is hard to argue that there is more upside potential ahead when the markets are already at all-time highs. I distinctly remember making a similar argument in June and July of 2015. And back then the market drifted down throughout the summer and declined around 15% in August of that year.
So what makes it different now from back then?
The economic data. In June of 2015 the economy was already starting to show signs of slowing after a multi-year period of growth. As I’ve said in previous commentaries, my analysis of how to invest starts by looking at whether the economic tide is coming in or going out. I use the analogy of investing with the economic tide—if the tide is going out then I want to be invested in the things that do well and/or preserve value when the economy is slowing (bonds and things that act like bonds). Likewise, I want to be invested in stocks and things that act like stocks when the economic tide is coming in because the economy is growing.
Notice that I haven’t said anything about ‘valuation’ or price-to-earnings ratios or ‘consensus’ or what Jim Cramer thinks. Those metrics and opinions don’t play a primary role in my decisions of how to preserve and grow mine and my clients portfolios. I do pay close attention to the data points that help determine whether the rate of change in economy is increasing or decreasing. And since the second half of November 2106 the economic data points have been indicating that the economy has started to accelerate again after several years of slowing GDP.
I started moving money back into stocks in early December and have added to those positions multiple times. Since then the markets have continued to set new all-time highs and any market pullbacks have been minimal. The positioning data (futures and options positioning) indicates that over the last three or four months that most professional investors have been ‘short’ the market. In other words, they think the market is going to decline significantly. Yet it has been over 3 months and the major indexes have continued to move higher.
In fact, the bearish bent of most professional investors is one reason why the markets continue to move higher. As the markets move it increases the losses of those that are betting the market will go down. As the pain increases (and they lose money) they have to ‘buy’ the market to get out of their losing position. This has been happening consistently time and again. Even now, the market consensus is still short the market after 3 months of gains. They are definitely feeling the pain!
The main reason why I am comfortable, though, isn’t that most professional investors are short the market. It is because the data. Here are just a few of the recent data points (source: Hedgeye):
- US Growth and Inflation Accelerating: The growth rate in US Retail Sales is double what is was 6 months ago.
- US Consumer Prices just hit a 61 month high in February at +2.7% growth year-over-year.
- US growth continues to accelerate while inflation is starting to slow. Over the last 3 months both growth and inflation were accelerating which is what resulted in the Fed raising interest rates yesterday. With inflation now decelerating it should increase US GDP.
- The Fed cut the top end of its 2017 GDP forecast and is projected growth of +1.7 – 2.3 year over year. The research I follow uses a predictive tracking algorithm (high degree of accuracy in the past) is estimating 2017 US GDP accelerating from +2.3% in the first quarter to +3.1% in Q4.
That last point is one of the most important because it illustrates the opportunity for the markets to go higher if the forecast of the ‘street’ is too low on US GDP this year. We may see temporary pullbacks in the markets but I expect them to recover as long as the economy continues to expand. In the meantime I will continue to monitor the data and the markets closely.
So my answer to “Is the Trump rally over?” is no.
Thanks for reading.
Twitter: @JeffVoudrie
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
