What’s Driving This Market? It’s Not Investors.
Larry Kudlow recently suggested there’d be no more interest-rate increases by the Federal Reserve during his lifetime.
Based on actuarial tables, the Director of the National Economic Council ,who turns 72 this year, should last another 13 years or so. In other words, the president’s top advisor on the economy is okay with zero-cost money through 2032. But who doesn’t love easy money? Some observers do give credit where it is due. First, easy money is great until you miss a payment or two. Second, it was easy money that has already brought us two progressively worse Wall Street meltdowns and Main Street recessions so far this century, David Stockman former Director Office of Management and Budget under President Reagan, wrote to subscribers April 26, 2019. You know that could happen again, right. And the next time couldn’t possibly be worse than the last two times, right. Of course it could.
I have met Larry Kudlow along with many professionals who represent respectable companies. Goldman Sachs forecast no Fed rate hikes through the end of 2020. And Charles Evans, the president of the Chicago Fed, provided the ‘money’ quotes in reports from Bloomberg, Reuters, and the Wall Street Journal about a rate cut later this year.
Global stocks have added $10 trillion in market capitalization so far this year, and our monetary central planners are here to keep it going, whether or not the “wealth effects” actually trickle down to Main Street. This stock market rally has everything, except investors. As The New York Times noted February 25, 2019, ”Armchair investors have been selling stock.” It’s been companies that “keep buying huge quantities of their own shares, propelling prices higher even as pensions, mutual funds, and individuals sit on their hands. American corporations flush with cash from last year’s tax cuts and a growing economy are buying back their own shares at an extraordinary clip. They have good reason: Buybacks allow them to return cash to shareholders, burnish key measures of financial performance and goose their share prices.”
Sober observers can see the fundamental shift in how the stock market is operating. Corporations have become the single largest source of demand for American stocks. It’s not the Millennials. In the face of economic, international, and political uncertainty the buy-back binge has helped a bull market celebrate its 10th birthday.
The S&P 500 is up about 340 percent since March 2009. But few expect that kind of gain over the next decade. Increasing numbers of investors are motivated to protect their gains and to diversify unlike they ever have before beyond the traditional 60/40, stocks/bonds mix. “The S&P 500 fell 14 percent in the fourth quarter, and 9 percent in December alone. That was the worst monthly performance since February 2009, and badly shook investor confidence, according to The New York Times, February 25, 2019.
A February 2019 survey of Bank of America Merrill Lynch portfolio managers reported that those holding more money in cash than usual outnumbered their equity friendly cohorts by 44 percentage points. That’s the biggest margin since January 2009. In sharp contrast, American companies fourth quarter 2018 bought an estimated $240 billion of their own shares, according to an analysis by the Goldman Sachs team that handles buybacks for major companies. “That’s nearly 60% higher than during the same period in 2017,” opined The New York Times.
This year some analysts at Goldman Sachs contend corporations will be by far the largest buyer of shares. Traditional investors to include individuals, mutual funds, pensions, and endowments are expected to be net sellers. Investors have good reason to be nervous. And investors do not need to see the future to prepare for the good, the bad, and the unforeseen. First, employ newer technology to help you determine how much market loss is acceptable to you. Second, add active management strategies where you can see a pattern that moved investors out of risk assets in a bad year, like 2008 and the same strategies moved money from cash and alternatives back into risk assets in a good year, like 2009. Third, identify positions that are considered alternative investments that have little if any correlation to the stock market. By analogy, good tennis and volleyball players learn to play both sides of the net, with the sun in their eyes and the gusts of wind on the court.
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