“Wise men speak because they have something to say; Fools because they have to say something.” –Plato
I’d like to begin this note by saying I’m not trying to imply anything regarding my writing with the above quote; I happen to like it and thought you might too. Although there is no shortage of opinions about the economy and stock market in the various media outlets, including the Wall Street Journal, unless those opinions can be supported by actual data and math, I have no interest.
The election of Donald Trump brought euphoria to the markets with the expectation of tax reform, regulatory reform and health care reform–the so-called Trump bump. There were many pundits who claimed that this euphoria was misplaced and that the markets would soon realize it and come “back down to reality.” It is now the second half of 2017 and none of these expected reforms have come to fruition. Yet, the stock market has pushed higher, let alone decline back down to some perceived level of reality. So why didn’t the stock market decline as everyone expected?
The answer to this question is quite simple. Underlying economic growth of the US economy has been strengthening not weakening as many had been expecting. Additionally, inflation has been inflecting lower. We began seeing this underlying market strength in early December via our analysis of Supply and Demand and the multitude of other indicators we follow in order to gauge what’s going on with the market beneath the surface. So far, none of the early warning signs we would expect to see in advance of a major market top were evident in the first half of 2017. In fact, our indicators have continued to strengthen, suggesting a healthy primary uptrend. It is now July and there are still no warning signs that would cause us to begin reducing our exposure to stocks. Our technical analysis of the stock market is further confirmed by our analysis of the economic data, which continues to point toward economic growth through the end of 2017 and into the first quarter of 2018. Obviously things can change, but we will remain vigilant.
There will always be something to worry about. Oil is in a bear market, bonds have been declining, the American oil fracking companies have a lot of debt, heck, there’s a ton of growing global debt period. The US Federal Reserve is threatening to raise interest rates and has a long history of causing a recession when doing so. The Fed has also said it wants to begin unwinding the $4 trillion dollars of US government bonds accumulated from years of quantitative easing (money printing) which is unchartered territory and ripe for policy mistakes that will end in tears. Europe is in the same position as they continue printing money and it’s the same with Japan too. How the global central banks extricate themselves from all of this will be interesting to say the least. Did I mention Italian banks are in horrible financial shape? Then there is the geopolitics of North Korea, Syria, Russia, and others sure to arise.
It is my nature to peek around corners and to use caution with every step. However, for the moment I continue to be positive on US stocks until our process and historical early warning signs begin to suggest otherwise.