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Over the past several weeks, the U.S. stock market has taken a pause from its blistering upward run that began immediately after the U.S. presidential election.
Yet, the most recent Investors Intelligence survey — which is a weekly poll of financial advisers conducted to see whether professional investors are bullish, bearish, or predicting a correction — showed that the percentage of bulls rose 3.6 percentage points to 61.8%… that’s the highest reading since June 2014! And that’s compared with the percentage of bearish advisers who logged in at only 17.6%. What’s more, the bulls-minus-bears line sits at 44.2% — its highest perch since March 2015.
What’s going on?
In last week’s Money and Markets article, I explained that most institutional fund managers are suffering from a severe case of the fear of missing out. That’s because performance and money flows talk on Wall Street. And what these indicators have been saying recently is that investors are abandoning hedge funds and some of the leading actively managed stock mutual funds in droves.
In fact, Harvard University’s endowment board was so fed up — after losing $2 billion last year while the U.S. stock market, as measured by the popular S&P 500 index, notched a total return of more than 13 percent — that it recently announced it was getting rid of half of its 230 employees and farming out management of most of its money.
Why? The main reason that investors are taking their money elsewhere is because of poor performance!
Indeed, hedge fund expert Seth Klarman, who manages more than $7 billion in the highly respected Baupost fund, recently said that hedge funds across the board delivered absolute returns of about 23% for the five-year period starting in 2010 compared to the S&P 500 index performance of 108% over the same time frame. That’s shocking underperformance by supposedly the best and brightest in the investment management business.
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So after having had their hat handed to them by the passive S&P 500 index for several years in a row, many professional investors have adopted a “if-you-can’t-beat ’em, join ’em strategy.” And they are now hiding out in U.S. stocks and their related indices, while waiting for some signal about which way the market is headed during the first few months of the President Trump era.
Why? It’s because they simply can’t afford to fall further behind.
So as they sit tight with their stock positions, they report a bullish position hoping that their views can influence investor optimism and propel the market higher.
But here’s the problem with that approach …
It’s often said that a picture is worth a thousand words. So here are three charts from the St. Louis Federal Reserve that show what sank the Obama agenda and left U.S. voters looking for a different way forward in our recent presidential election. And guess what? Despite the Trump administration’s rhetoric and prolific presidential tweets, these macro issues haven’t gone away.
The chart below shows the civilian labor force participation rate (the percentage of working-age population who are actually participating in the labor force — either currently holding a job or actively looking for one). It’s clear from this chart that the overall participation rate has plunged since the mid-1990s, while workers close to retirement have been drawn back into the job market.
This means exactly what you think it does: Outside of workers 55 years of age and older, Americans of working age have 1.5 million fewer jobs today than 15 years ago. This is primarily the result of two factors: (1) the replacement of entry-level and low-skilled U.S. jobs with cheaply outsourced labor abroad, and (2) the zero-interest rate monetary policies pursued by the world’s central banks as a result of the Great Recession have destabilized retirement plans, leaving those near retirement without a safe source of interest income on accumulated savings, so older Americans are working longer.
Next, while U.S. employment has been hollowed out, so too have incomes. Wages and salaries, as a share of GDP, have never been lower.
Yet despite weak incomes, personal consumption as a share of GDP has never been higher. Not surprisingly, the same is true for consumer credit as a share of GDP, as monetary policy has encouraged the persistent accumulation of debt to bridge the gap between income and consumption.
Making things even for more difficult for a Trump administration is that in the last 100 years there has never been a two-term presidency that wasn’t followed, within 12 months, by a recession. But we do live in interesting times, and it’s possible that the world’s central banks will make good on their promises to double down on their experimental economic policies in a way that will kick the can down the road on a recession.
The lesson here is: Don’t let the stock market be your guide in these highly UNCERTAIN times when most stocks are off the chart expensive, especially now … Â when the market’s being heavily influenced by institutional investors that are just hoping to catch up.
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Here’s what you should do instead: Watch interest rates as I explained in my January 6, Money and Markets article — specifically the 10-year U.S. Treasury — Â for your signal as to which way the market is headed.
If it dips significantly below 2.5%, it signals that stocks are headed lower. On the other hand, if it breaks through the 2.7% barrier on the upside, then we are likely going higher on another bull run. And if it bounces around in a range of just over or under 2.5%, it means more of the same.
What should investors do while waiting?
For my Safe Money subscribers, I have put together a core holding of the highest-quality stocks on the globe … Â I call them the Dependable Dozen. These are companies that can grow through thick and thin and pay a cash dividend to boot that’s comparable to the yield on the 10-year U.S. Treasury.
And if you haven’t already done so, I’d recommend that you sprinkle a little gold into your portfolio when the price is right because it comes with a double-sided benefit: It should provide some downside protection if stocks fall; but if they go on another bull run, gold is a terrific inflation hedge.
Come back and visit next week and I’ll reveal Donald Trump’s insiders’ game plan for the economy and the U.S. stock market. It’s a doozy, and something you just have to know about!
Best wishes,
Bill Hall
Bill Hall is the editor of the Safe Money Report. He is a Certified Public Accountant (CPA), Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP). Besides his editorial duties with Weiss Research, Bill is the managing director of Plimsoll Mark Capital, a firm that provides financial, tax and investment advice to wealthy families all over the world.
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Great analysis.
Bill,
1980 was the start of the Republican Revoution. Snce then millions of jobs where sent overseas thanks to the Republican initiatives of GATT and NAFTA, The deficit and debt have exploded thanks to those take cuts to the Wealthy Republicans by their elected lap dogs, and since 1929 the Stck Market gains when led by Democratic Presidents has been 300
Umm … GATT and NAFTA were Democratic initiatives, not Republican ones. Until recently, the Democrats were the more reliably pro-free trade party. Before Nixon, the Republicans still had a strongly protectionist wing, although they’ve since been generally comfortable with freer trade. Obviously, that might be changing now.
In the 19th century, the Republicans had a significant working class vote and were strongly protectionist. It’s coming back.
Most job destruction is caused by automation, not offshoring. Blaming foreigners feels better though, better than blaming robots, which lacks the same emotional punch.
The real problem is the reserve status and chronic overvaluation of the US dollar. That is what has allowed us, for so long, to import, borrow, and consume too much, while saving and exporting too little.
ohhhhh please cmon eagle495 the north american free trade agreement otherwise known as ( NAFTA ) and the general agreement on tariffs and trade otherwise known as ( GATT ) were all signed into law by a democrat you know him hillery clintons husband bill clinton in the early 90s his exact words were its going to create 300,000 high paying jobs here in just the first month , but what really happened we lost over 300,000 high paying jobs to mexico
yes eagle495 the united states lost over 300,000 of its high paying jobs to mexico in just the first month and the job loss hasnt stopped its been going on sinc e the passage of NAFTA thanks to the clintons everyone now knows the clintons were liars and deceivers back then like hillery is now
I agree with part of what you say, Eagle495, but the critics have only pointed out what was wrong: that the Democrats were in favor of the trade agreements. But that, I think, is irrelevant. What is relevant is that the tax cuts initiated a steady increase in income distribution in favor of the wealthy. The loss of jobs may have been hastened by trade agreements, but it was inevitable anyway. Had we not cut taxes on the wealthy we would have had money for retraining those who lost their jobs, for infrastructure to allow business to keep costs down and remain more competitive, and to keep education costs down to encourage a more skilled work force, all of which would have helped us maintain our competitive edge even though we have been losing manufacturing jobs.
The Democratic party got lost by focusing on the concerns of voters on the east and west coast: women’s rights, LGBT rights, global warming–not that these are not important concerns–and ignored voters in the heartland who just want a decent job that pays well enough to raise their families. The chart of declining workforce participation rates generally, and of steeply rising rates for those over 55, says an awful lot about the state of affairs. We should raise taxes back up on the wealthy to fund all of those things that make life for the vast majority of us better. Affordable education and improved infrastructure is a good place to start.
Times better than when lead by a Republicans….
In other words, the best reason for getting out may simply be Political Economic History !…. :(
the truth is eagle495 barack obama has managed to double the national debt in 8 years it took the birth of this great nation thru 2008 to accrue the first 10 trillion and the revolutionary war, the civil war, the war of 1812, the spanish american war, world war 1 and 2 the korean war the vietnam war , the gulf war, and operation iraqi freedom to amass the first ten trillion in debt and what war did obama have to deal with to spend 10 trillions of dollars oh yea his only war was wealth redistribution
The debt went up under Obama because of fixed expenditures. What do you think Obama could have done other than slash social security checks and Medicare payments to close the budget. Not to mention military spending is more or less fixed. There was no room for spending cuts. Do you honestly think if he tried to roll back Reagan and Bush tax cuts that disproportionately benefitted corporations and the wealthy he’d of had a chance to pass that? Every single republican would oppose it and probably even his own party. If you want to blame anyone blame Reagan and Greenspan for huge tax cuts and voodoo economics that have allowed deficit spending for this long. The problem is the country has fixed expenditures and we don’t collect enough taxes. It’s simple math. Too many tax loopholes for the rich and the middle class don’t make enough to collect enough taxes from. If you raise taxes on the middle class and poor it will cause a depression since we barely have enough money circulating as it is.
The Fed, holding interest rates down for so long, drove many seniors into remaining in the work force rather than retiring at the traditional age. I know I worked, part time, at least, until I was 76, because I had little savings, and was in good health and able to continue. This meant less opportunity for younger workers. Mr. Trump, if he makes it through two terms, will be 78, when he “retires”. ‘Not a very good omen for the young would-be worker.
Bill, thank you for your insightful commentary! Regards, Robt. Isaacs
I am looking at a 10 year monthly chart. All indicators are overbought to massively overbought. So, is the market likely to correct soon or is it expected for the DOW to reach 30,000 before it corrects?
WHAT SMART INVESTORS SHOULD BE DOING
I find it interesting that the benchmarks for judging high financial advisor bulls vs bears is only just 2-3 years ago ( 2014-2015). This short time frame either suggests this “Bull” market can only be evaluated in three year increments ( not a secular or generational bull market to begin with, as we had from 1981-2000).
Truthfully, this is not a normal or traditional business or investment cycle anyway due to persistent and extreme Central Bank (FED) monetary policy machinations. Its why this market is repeatedly referred to as “The most unloved Bull Market in History”. Its the only game in town, but not the “best” one for sure. Lots of systemic market risk at these valuations, as Bill already stated.
To be effective in today’s overvalued U.S. Market you need to deviate from the crowd and look out way ahead, buying quality and deeply discounted ( deep value) quality foreign listed company stocks, real assets such as gold, productive real estate, and part ownership of quality private companies ( Private Equity), again at steep discounts to cash flow. Another complementary approach for those who invest in equities is some kind of Trend-Following Investment strategy and system. You have to be different to avoid the coming train wreck. Global diversification and asset class diversification are necessary going forward
In addition, Star Hedge Fund Manager, Ray Dalio of Bridgewater Associates, laid-out the biggest long term risks (3) to the economy and markets quite well in the following article. ( Hint: Things are not going to get better but quite the contrary, including lower annual total returns with much higher risks for intestors who remain in markets.)
http://www.theworldin.com/article/12774/back-future