Day 102: Anger vs. Fear

The Mother's Little Helper portfolio was down today (-0.05%) for a loss of -$355.70. Overall gain to date: +$83,488.68 (+14.30%). According to CNN Money the S&P 500 is up +5.21% Year To Date.

I was asked recently what I think is driving the markets; this question is being asked repeatedly by pundits, commentators, hedge fund managers and home-gamer investors like us. I'm not sure why anyone thinks I might have the answer, I just have my opinion, which is all anyone has to offer. I used to see Good vs. Bad, Republican vs. Democrat, Rich vs. Poor, pick your lens of the world. Today there seems more like Anger vs. Fear. For some, Trump represented Anger and Clinton represented Fear. Look around the world, your company, in every walk of life; the angry are getting engaged, while the fearful appear to be getting entrenched. Good or bad I don't make any judgement, this is simply an observation and probably just a phase of a much longer cycle of human events.

I still contend that it's not the President, his comments drive sentiment. Lacking any real policies there is nothing behind the Trump Bump. As fond as I am of Alan Greenspan (he was my Dad's teaching assistant in college) I don't think that it's irrational exuberance, we're just not there yet; besides Alan was wrong when he made that famous speech. The DOW skyrocketed higher for the next 3 quarters from about 6500, to about 11,500. And here we sit today at DOW 20,656. I commented in an earlier post that it's earnings not Trump, but that only seems like one piece of a larger pie. Commentators frequently say we're no longer in early innings, but that isn't too helpful if you're trying to put money to work. My own analogy of the stock market is that its more like football than baseball. A game played in quarters and measured by incremental gains and losses with a steel chain that has no empathy and zero stretch for close calls. Play the game and you only have two outcomes, you're winner or you're a looser. I let others play the game in quarters, the numbers speak for themselves, stay invested and time will reward you as a winner.

Crystal ball? No. And frankly I really don't like this parlor game because this kind of commentary can mess with peoples financial futures. I'm simply venting my perspective on what's driving the market and what will sustain it over the next few years. This doesn't mean I'm right, it's just my opinion. I'm also frustrated by the daily drone of pundits who say this bull market has gone on too long, it's too old, we must be due for a big collapse, maybe even a recession. Based on what? Show me the data! I say milk has an expiration date, bull markets don't. However, bear markets do have an expiration date; bear markets typically only last 18 months or less.

Since all I have is my own opinion, here's what forms that opinion. The conditions for a recession just don't exist. So if you're hording cash and staying out of the market let me just say that I understand the fear, but your anger is going to flare up when you realize you missed a lot of great investing opportunities. Bear market declines are always associated with investors sensing an oncoming recession. Conditions don't exist for an oncoming recession, therefore a bear market is not likely anytime soon. Can't have one without the other is what I'm saying.

All the basic economic data looks pretty good. Just look at China, growth rate is much higher than the US and sustaining it nicely. Ignore the hype over currency manipulation, heck the US manipulates its currency all the time and China is just doing the same thing with a much younger capital market. Europe is doing well and equities are much lower priced than in the US. Money will flow to where its treated best, so expect more investment in European equities and index funds. US growth isn't bad and its picking up. I thought today's jobs report was pretty good. But if you listen to the financial news it sounds like a catastrophe, "Only 98,000 jobs! Are we missing a one in front of that number?" Come on, we're at 4.5%, that's full employment. Does everyone thing we just endlessly keep adding six figure employment every month. Today's jobs number says we're doing great, and average salaries are increasing too. The Fed is moving slowly on rate hikes, even Yellen's mention of unwinding the Fed's $4.5 Trillion balance sheet will happen very slowly because that equivalent to a rate hike. I wonder if it will happen at all. Add in an unexpected geopolitical event (the US bombed an airbase in Syria) and frankly you get a picture of a steady, growing economy that still has a lot of room to run and investors who are reacting in a calm and orderly fashion.

Remember during the campaign when economists were laughing at the notion of the US economy growing at 4% or more a year. Let's say the labor force grows at 1/2% per year. Add on 1-1/2% per year in productivity growth and you have 2% real growth. We get to the 1-1/2% by removing a bunch of unnecessary regulations, simplifying tax codes, job training and a few other factors, but it's completely possible to sustain. Add on 2% for inflation (healthy number Yellen has targeted) and we get to 4% nominal GDP growth. In a 4% US growth world (that's a normal growth world) the US 10-year belongs at 4%, not the 2.3% where it's at now. So relax, rates are low, people are working, money is starting to flow again. Will there be problems, sure, especially from the bond market when rates go up past 3%, but we'll get through that and be just fine. Even when rates climb past 3% I can't see anything happening that would create the conditions required for a recession.

All that said, I think it takes 2 more years at least to get to that 4% nominal GDP, normal world. The process will be slow, a little volatile, but a lot of fun too. That's why I believe this bull market has at least 2 more years.

Stay Invested,

Clay Baker

Disclosure: I am personally invested long in these stocks that appear in the MLH portfolio and may purchase or sell share withing the next 72 hours. I am also invested in other stocks that do not appear in the MLH portfolio: BA, BRK.B, CELG, CSCO, CTXS, CVX, DOW, DVAX, FB, IBM, NTES, NVDA, OMER, PFE, PG, RDHL, SCHW, THO, TWX, VEEV, VZ, XLNX, XOM

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.