The Big Paradox That Is Sending Stocks Soaring

This is indeed a rare time in stock market history. That’s because U.S. stocks, as measured by the bellwether Dow Jones Industrial Average, haven’t just been hanging out near all-time highs. They’ve been printing new highs almost daily.

Think about it: It was just two weeks ago that the Dow Industrials stormed past 24,000 for the first time. And it has barely looked back.

What’s even more impressive is that this index has made five 1,000-point moves this year. It’s a feat that’s unmatched in the index’s 120-plus-year history. This latest move took place within just 31 trading days. Wow!

Before this year, only six (1995, 1997, 1999, 2007, 2013, 2014) witnessed more than one 1,000-point Dow jump. And those years only saw two.

Yes, it’s been an astonishing run. And all this momentum on the upside has me convinced that we’ll likely see Dow 25,000 by year-end …  with the tax-reform package providing the tailwind that will send us there.

For months, I’ve been telling anyone who would listen that as long as my Magic Metric — the yield on the 10-year U.S. Treasury — stays in the sweet spot, the stock market is headed higher. And as you can see, the market action so far this year has confirmed my prediction.

While the Dow races past record highs, faster than ever, some 63% of Americans agree with me and say stocks will trade even higher next year. It’s a question University of Michigan researchers have asked every year since 2002, when it launched this survey.

Yet while many Americans may be buying stocks, they aren’t splurging on much else. Our spending on the good things in life — such as going out to eat or attending a movie — still lags.

So … on one hand you have the stock market skyrocketing higher. But on the other, you have anemic growth in the “wants-not-needs” part of consumer spending.

And therein lies the big paradox that will continue to send the U.S. stock market higher … as well as catapult carefully selected, high-quality growth stocks to an entirely new level.

It’s a topic no one in the mainstream media is even mentioning because they are having trouble connecting the dots. But you MUST know about it to keep protecting — and to keep growing — your money.

That’s because, as long as most Americans continue to guard the dollars in their wallets and pocketbooks, the U.S. economy will continue to sputter along.

How do I know this?

Well, according to a recent New York Fed study, the amount of money spent per person on so-called discretionary items has just finally climbed back to its pre-Great Recession level.

What are discretionary items? They include things like eating out, joining a gym, going to an amusement park or using central air conditioning at home.

These are services people want — but don’t need to survive — and they can be reduced or eliminated when money is tight.

Think about what I am saying: It took almost TEN YEARS and TRILLIONS OF DOLLARS OF GOVERNMENT DEBT to push consumer spending back to the level it was in 2007.

However, what the economy needs to get really rolling again is for households to want to keep parting with their cash. That’s because consumer spending is the main engine of the U.S. economy; it accounts for about 70% of total GDP.

But this spending is just not happening, as you can see in the chart below …

Click image for larger view

Look, even the Fed admitted that the U.S. economy is only growing at about a 2.5% clip when they raised the short-term discount rate earlier this week. Yes, that’s only 2.5% when the Trump administration’s target is for 4% growth. Yikes!

Going forward, it’s the slow-growing economy that will in turn put a lid on further interest rate increases and continue to force the Fed — as well as the world’s other central banks — to crank more money into the financial system to prevent a recession.

As I’ve said before, it’s this unstoppable force of central bank intervention that will continue to send stocks higher.

And it’s going to continue for as far as the eye can see despite what Janet Yellen may be saying publicly about shrinking the Fed’s bloated balance sheet.

But remember, it’s this slow-growth environment that has been, and will remain, pure bliss for U.S. stock investors.

Particularly those investing in a select group of high-quality growth stocks.

That’s because growth is the magic elixir for a world starved of consumer spending.

And companies that can consistently grow their bottom lines by producing things people will buy will be rewarded with whopping valuations in this environment.

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.