Here we go again. At the time of writing we have set (yet again) another stock market record. It seems that the only thing needed for a stock market record nowadays is an alarm clock because they keep happening every day. Those of us old enough to remember 1987 – pertinent as this is the 30th anniversary week, are constantly reminded of how markets are supposed to act. I know that sounds funny but history tells us that we should have had some pullbacks by now. The mere fact that we haven’t suggests that the market is rewarding those with no memory. I have often thought that sometimes in this industry your memory can be a hindrance – this is a good example of that.
I can tell that things are kind of slow by what the producers on the various television stations send me as the preferred topics of the day. The usual suspects are the FANG + M stocks (Facebook, Amazon, Netflix and Google + Microsoft), driverless cars, Tesla and Tax cuts. Sometimes it is exasperating to have to continually go on about the ineptness of Congress or the frivolity of driverless automobiles but I guess these are the stories that sell advertisements.
The things that I would like to talk about are not as headline grabbing but I think that they are interesting none the less. The first being that back in 1987 the size of the real economy (i.e. GDP) versus the size of the financial economy (stocks and bonds) was about equal – roughly one to one. Today we see that relationship in a much different light with the financial economy now roughly 3.5 times bigger than the real economy. Perhaps another example of a good time to not have a memory. It has only taken us 2.5 months to get to 23,000 from 22,000. That seems like a very short time to me. Solidly sanguine is the phrase that comes to mind when I try and describe the stock market. The warning signs are there but can go on for a lot longer than I can stay solvent. I think we have all heard that lesson before. North Korea – no big deal. A schizophrenic Congress – no big deal. Decelerating earnings – no big deal. Except for the fact I think they are big deals but the stock market doesn’t care. The current low level of volatility only happens less than 2% of the time in the equity market. Can anyone really look at themselves in the mirror and say that is no big deal? If it weren’t for the fact that a lot of smart people have been calling a top in the market I would be a lot more bearish. I guess I will have to wait for the last perma-bear to get long before I feel comfortable calling a top to the market.
So, an interest rate rise in December looks as though it is a near certainty. I am not sure how I feel about that because, once again, my memory tells me that we only ever used to raise rates to cool off an overheating economy or to get out in front of one that is about to overheat. The Michigan Sentiment Survey says that Americans are the most confident they have been since 2004. That should bode pretty well shouldn’t it? Getting the consumer on board with a recovery is a key psychological aspect that sometimes gets overlooked. However, Gallup, in a much larger survey says that the confidence in the economy has turned negative for the first time since the election. Maybe it was the bad jobs number (hurricane induced) or maybe the fact that roughly 15% of Americans own 85% of the stocks. The 85% that don’t own much in the way of equities has been severely left behind in this so-called recovery. What is middle America going to fall back on if the economy/stock market goes down the drain? Throw in the fact that there are tons of unfunded liabilities (pensions) and we will be a nation of 98-year olds serving ice cream at Dairy Queen because we are broke and can’t afford to retire. But, yet again, my memory is a hindrance. A few weeks ago, we set an all-time weekly record for equity inflows. Also, the amount of money under management with the top 5 asset managers is roughly equal to the U.S. economy. Do any of these stats, in the environment, raise any concerns to anyone out there except for me? Throw in the fact that the equity market has only been less volatile than now 2% of the time and the hair on the back of my neck stands up. With my tongue in my cheek it seems like a good time to raise rates if you ask me? Right?
In earlier letters I have said that this interest rate rise cycle will not get too far ahead of us. The economy, the man on the street and lastly the U.S. government can’t stomach interest rate levels of the past. I just don’t see that happening. We will waffle on about it for a while but solidly sanguine is a great descriptor. We are growing but no fast at all. Things are slowly getting better but we still see no inflation. I believe even Janet Yellen doesn’t have a good reason why this is the case. Interest will stay relatively low for a lot longer than anyone of us can imagine.
So, what is the good news you ask? Well, there are some green shoots of recovery. It would be nice to see them more widely spread out but we will still take them. Innovation is still happening and we are still creating gobs and gobs of wealth. The American ingenuity is alive and kicking. Just look at all the new ideas coming out of Silicon Valley. Those are the types of things that give me hope and keep me excited about the future. The future no doubt will be volatile but there are tons of great ideas around the corner. Maybe, just maybe, one of these great ideas will be the Knight in Shining Armour the Fed has been hoping for all these quarters. We shall see.