What the markets are telling me now

As U.S. stocks continued their post-Election Day surge marked by the Dow Jones Industrial Average smashing through the mythical 20,000 level, it’s become obvious to me that most Wall Street professionals and institutional investors don’t want to miss the boat.

Sure, stocks have backed off slightly since hitting an all-time high last week but they are still hovering at record high levels despite the high level of UNCERTAINTY surrounding President Trump and his policies that I discussed in my January 6, Money and Markets Article.

Why?

As a Wall Street insider, I can tell you that the most important thing to most professional and institutional money managers is keeping their jobs. On Wall Street, it’s called “career risk.” And the best way to manage career risk is to follow along with the herd; meaning don’t allow your fund to significantly deviate from the index or benchmark.

For stock fund managers, the primary benchmark is the S&P 500. So as the S&P 500 has gained steam and moved higher over the past two months, more institutional investors have been forced to jump aboard to keep from falling behind. It becomes a self-fulfilling prophecy that I’ve seen again and again, and it most often ends badly.

They cloak their actions with all sorts of fancy language about forward P/E ratios and ridiculous phrases like “the return of animal spirits.”

I’ve been managing money for some of the wealthiest families in the world for more than 30 years, and I’ve never heard the term “animal spirits” used in the context of the stock market. I, obviously, know that the economist, John Maynard Keynes, first coined the term in his widely-read treatise The General Theory of Employment, Interest, and Money (1936) in his attempt to explain how the business cycle is driven by the instability of human nature.

Regardless, the term is currently being used to describe all different types of financial market behavior just because it sounds catchy. I, for one, have no interest in having my hard-earned money managed by anyone who’s using “animal spirits” as a guide.

One of the primary attributes of being a successful investor is learning to control your emotions.

That’s because one of the primary attributes of being a successful investor is learning to control your emotions and making a dispassionate assessment of the world around you. Animal spirits? — that’s exactly what you don’t want to do. Disregard it as hogwash and move on.

Now, here’s something that isn’t hogwash and that you should be paying very close attention to.

Late last week, the Department of Commerce released GDP growth for the fourth quarter of 2016, and the lack of growth was shocking. But the announcement received very little coverage by the mainstream media because of their single-minded focus on President Donald Trump’s unconventional Tweets.

That’s why I am bringing it to your attention. Take a look at the chart below.

This chart reports that the U.S economy ended 2016 on a familiar trajectory of roughly 2% economic growth, which is well below escape velocity from the current economic malaise in which we are stuck. This lackluster trend has prevailed through most of the current expansion and is the statistic that President Trump has promised to double in the face of stubborn long-term headwinds. For more on the challenges facing Trump’s economic growth policies, see my December 9, 2016 Money and Markets article.

This is a big, big deal because it shows that the U.S. economy grew at an anemic, inflation-adjusted annual rate of only 1.9% in the fourth quarter. Yes, that’s less than 2 percent and significantly below consensus expectations. In fact, Goldman Sachs — in their hot off the presses 2017 Economic Outlook —  expected 3% economic growth in the fourth quarter. See the chart below.

That’s 1.9% actual growth compared to 3% expected growth …  that’s a big miss! What’s more, the lack of growth was particularly disappointing considering that it marked a slowdown from a fleeting third-quarter 3.5% growth spurt.

Think about it: This means for Trump to hit his 4% growth target, his policies need to increase the rate of growth in the economy by more than 100 percent to move from 1.9% to 4%. Wow! That’s a tall task indeed.

And here’s the reason why you as an everyday investor need to know about this: It’s because prices in the U.S. stock market have moved way ahead of the fundamentals in the real economy as fund managers and institutional investors fear being left out of the current rally. Sure, this happens all the time but sooner or later Wall Street’s expectations have to align with economic reality. And the current equation is way out of whack.

Look, I’m not a curmudgeon or a naysayer. But as a Safe Money investor and the editor of the Safe Money Report, I want to invest only when the odds are squarely on my side. And I know that jumping into a red-hot stock market that’s been heading straight up on emotion alone usually ends badly.

And here’s where you, the everyday investor, can turn the tables on the big boys on Wall Street. You don’t have to put your hard-earned investment capital at risk like they do. That’s because you don’t have a board of directors or an investment committee to which you are accountable for evaluating your every move.

Look, I know it can be hard to trust your contrarian instincts when it seems everyone around you is making money …  except for you.

To buoy your resolve, here are three quotes from men who made millions on Wall Street and who I’ve had the great pleasure of meeting personally.

1.”Always have greed when others have fear and have fear when others have greed.” Roy Neuberger, co-founder Neuberger & Berman.

2.”If you want to have a better performance than the crowd, you must do things differently from the crowd.” Sir John Templeton, founder Templeton Investments.

3.”Price is what you pay. Value is what you get.” Warren Buffett, CEO Berkshire Hathaway.

Heed their advice because, looking forward, the post-Brexit and Donald Trump-era financial markets are going to be very volatile. And that means violent swings from one side of the boat to the other.

So, hold onto your hats, stay calm and use this volatility to your advantage. Currently, I recommend using Wall Street’s newly found euphoria to unload some of your low-quality positions while giddy buyers are eagerly offering to overpay. That’s what I am doing in the portfolios that I manage.

One more thing before I sign off: CNBC recently reported that stock market returns are negative about 80 percent of the time in the month of February following a presidential election year… that’s still another reason to keep some powder dry!

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.