Bears are sharpening their claws

Bears Are Sharpening Their Claws

Buy low, sell high. Are we at the peak, or will we climb over the wall of worry? The Stock Market’s “Trump Trade” has flourished, with record-setting market numbers since his election last November. We are certainly in a “new normal”. If the P/E (price-earning) ratios were a historical predictor, we are due for a stock sell-off. If “animal spirits” were an indicator, this market may remain bullish. If you are solely looking at data, retail sales are pointing directly up, as is the most recent CPI report. If long term cycles are a gauge, we are nearing the end of 16-18 year bull market.

But the data leaves out some broader intangibles that are impacting stock prices. The Obama-era stock market gains were artificial, based upon certain historical factors:

1. Price inflation due to the printing of money.
2. Federal Reserve zero interest rate policies.
3. Historic levels of debt creation and fiscal deficits beyond anything we have seen before, and therefore expansionary in its effect.
4. It started from the bottom, in March 2009 the floor was reached at Dow 6,547. This meant it had no other direction to go but up.

The market was not growing because of the traditional business cycle: a new Apple device was announced, a new life-saving drug was created, or infrastructure spending or construction. There was no underlying economic growth supporting a bull market. In fact, it can be said that Main Street essentially decoupled from Wall Street.

So, the constant drumbeat from perma-bears that there was no way the market could keep going up, and that we will see a correction, proved to be constantly wrong. But that doesn’t mean they will remain wrong on the issue for much longer…there are several policy issues that could serve as headwinds, or as the trigger for, a significant market correction.

They are:

1) Failure to repeal Obamacare.
2) Failure to reform the administrative state.
3) Failure to reform the tax code.
4) Federal Reserve Interest Rate hikes.

Enough has been written regarding each one, but they all warrant repeating. Much of the “Trump Effect” in stocks is based upon a belief that action will be taken on the policy front in D.C. First, failure to repeal Obamacare, an election year promise since 2010, could send markets in a tumble. While some insurance carriers benefit from the subsidies received, the broader market indices are negatively impacted by small and medium sized business health insurance costs, corporate and individual compliance costs, and the Obamacare tax increases.
Second, failure to repeal and reform the regulatory state – from the auto-pilot nature of some spending programs to EPA regulations to Dodd-Frank – it is clear the Trump Effect is also benefiting from a market-place expectation that truly cutting government is in the works.

Third, reforming the tax code would be necessary no matter whose party was in power in Washington. The highest corporate tax rates in the world….the byzantine, inefficient, burdensome tax rates on middle income earners…the double taxation which keeps corporate cash abroad…every aspect of U.S. tax policy is bad for business. While the Trump plan and the House plan have varying degrees of good and bad ideas, the bottom line is both flatten rates on both corporate and individual tax payers. This will spur economic growth and in turn drive up tax revenue for the government. For the economy, it is an absolute must, and the belief it is coming has helped drive the market surge since last November.

Lastly, and the most unpredictable, is the Fed. Three rate hikes and historically the market has reversed. If a third hike since December 2015 is in the offering, that could spell trouble for stocks. It doesn’t have to, it didn’t for Greenspan in 2004, and often the strong dollar combined with other economic factors could simply show a strengthening of the economy and an extension of the current cycle. But that’s a lot of history to overcome.

If Washington doesn’t go to work, and get major reform legislation passed, the fear of a correction and a bear market becomes more and more real. When that reality hits, be sure you have your money in a place where it is safe from market losses. Our advisors at Ty J. Young Inc. are experts in helping people like you protect their principal while earning a reasonable rate of return. You don’t have to lose money, call us today at 877-912-1919.

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