By most measurements, the economy has recovered from the “malaise” of the last 8 years. Real growth driven by earnings, profits, wage increases, and economic development seems to be spurring the rise in real GDP numbers over the last 3 quarters.
That does not change what we have witnessed in the last decade – a decoupling of Wall Street from Main Street. Real economic growth does not necessarily come from advances on Wall Street anymore, and vice versa. Having become tethered to federal reserve policy making and global markets, Wall Street gains are no longer dependent on the same gains on Main Street. Both used to move in concert, but now the Federal intervention into the free market starting in 2008 has seemingly changed the equation.
This is seen in a little data point known as the “Personal Consumption Expenditure” indicator (PCE). It is the main variant of data that determines the CPI but then compares it to the upward and downward movement in stocks. The history of the PCE shows a range of 0.2 and 1% in prices, individual consumption power, and the market. This remained outside the mean during the market run-ups during dot.com and the 2008 banking crisis. but today, the PCE is in the 25-30% range … meaning stock prices have outpaced income by that high of a percentage. These are historic numbers, and obviously, suggest a very dangerous position for the market and the investor’s portfolio.
This is nothing new to our followers and has been a common refrain from our blog posts over the years – the most recent market downturn is yet another example of this “decoupling.” While unemployment is low, tax reform is in place, and GDP is up, Wall Street swung wildly over the last two weeks. We may be in the eye of the storm, or the calm before the storm, but the data suggests the volatility is not over with yet.
5 Reasons Market Volatility is Just Getting Started:
- Interest rates are going up. Bond yields on the benchmark 10-year treasury note have been near 3% for the last 6 months. Investors move to treasuries and out of stocks when you can get that safe of a return. While the Fed Funds rate remains historically low, it began inching back up under Janet Yellen and remains signaling an upward trajectory. Interest rates in the real world have already been heading upward for a few years now. Rising interest rates typically slows economic growth, and in turn, this hurts corporate earnings. All in all, while a healthy sign and evidence of a normalizing economy, it can and will make stock market decisions more volatile.
- Inflation is back. The US Bureau of Labor Statistics set January inflation in the US at 2.1%, the same for December 2017. Year over year that is down (2.5% January 2017). But the annual trend is unnerving – 2015 was less than 1% … 2016 was 1.28% … last year inflation was at 2.65%. Those numbers are jumping, and rapidly. Most economists have been wrong about inflation, expecting a huge rise thanks to the gargantuan US debt profile. That has not happened. Some inflation is reflected in a growing economy, as more wealth chases more goods and services to purchase. Bottom line, the annual data reflects a worrisome trend which suggests rising stock prices may out-strip the investors’ ability to purchase.
- 3. VIX is showing wild swings. From 2/1 through 2/5, the VIX jumped 300%. As most of our readers know, the CBOE Volatility Index – known by its ticker symbol VIX – “….is a popular measure of the stock market’s expectation of volatility implied by S&P 500 index options.” It is elevated for the year and shows signs of continued market turmoil. Some recent headlines suggest the VIX is fixed, pardon the pun, but it seems to have functioned right on cue as the markets plunged over a 2-week period.
- Stocks are over-priced. While firm believers in our own theory of market performance, based upon our 2017 blog regarding the rise of the “Non-Fundamentals”, it is still hard to escape some basic market history. Utilizing the tried and true method of measuring price to earnings ratios (P/E ratio), the gold standard being the Case-Shiller Index, we see some troubling signs. The average P/E ratio since 1885 has been 17. The current P/E ratio is 32. On Black Tuesday in 1929? 30. 2088 Banking crisis? 32. Dot.com bubble? 45. As we see from those numbers, we have a way to go before we reach the dot.com collapse. But … we are already in the same territory as the Great Depression and the 2008 crash.
- Government debt. Never in history has a country run up debts equivalent to the current US debt load. We doubled our debt twice, from 2001-2009, and then, in unprecedented fashion, again from 2009-2017, from $10 trillion to $20 trillion. The current government needs to spend on defense after what we have done to the military for the last 8 years, and of course, there are needed infrastructure projects that require funding. But combined with a huge tax cut, we have essentially decided to deficit finance these major projects (this is not a debate over conservative beliefs in tax cuts creating more revenue – they do as the historical record suggests. But you can’t add more spending above the increase in revenue and still get the books to balance). Government debt, the borrowing needed to sustain these levels of spending, the interest on the debt which will inevitably rise over time … this will crowd out private investment and cause great volatility in US markets.
Most of our clients and blog readers have done well in the market, and their principal protection products have participated in those market gains as well. But, if you still have a sizable portion of your portfolio exposed to market risk, or have gains from the last several years you would like to move into protected vehicles, now is the time. Call now to speak with our expert advisors to learn more! 877-912-1919