On Tuesday, May 16, 2017 the DOW was just 21 points from 21,000 again. What a difference a day makes, as the DOW closed Wednesday, May 17 down 372.83 (-1.78%), according to Yahoo Finance. My readers have come to know my team and I do all things possible to separate the news from the noise for you, so this time will be no different.
Here’s what appears to me to be going on right now. Since Donald Trump was elected there has been great optimism for much better business opportunities across the land. What’s more, the economic policies put forward by the President have shown stunning resilience. What may be happening at this time is that investors bought the rumors and are selling the news.
The group that stands at the top of the kicked to the curb list is the banks. “An index tracking the sector, which had been seen as benefiting from Trump’s call for looser regulatory oversight, slipped by 3.5% on Wednesday, headed for its biggest drop in almost two months,” reports Joe Ciolli at Business Insider on May, 17, 2017. Ciolli noted that banks experienced the greatest bounce after the election enjoying a 32% gain through March 1, almost three times the increase of the S&P 500.
“While it's far too early to call the end of the Trump trade, there's no doubt traders are feeling more trepidation about stocks than at any point since the election. For evidence of that, look no further than the CBOE Volatility Index, or VIX, a barometer of investor nervousness. Until Wednesday, the so-called fear gauge was hovering close to its lowest level on record. Now it has spiked by as much as 32%, the biggest intraday increase since September 9, two months before the election,” submits Ciollli.
You know that all trees do not grow to the sky. Yet many market observers, in my opinion, believe complacency is in order. Some believe that Central Banks have everything under control and that governments have the ability to simply set a thermostat on the wall of the economy, and let the machines will do all of the work heating and cooling the environment we live in to keep things nice and comfy.
An equity portfolio manager I was meeting with was asked a question, to which he replied, “I don’t know.” He quickly corrected himself to say, “Opinions are like belly buttons, everybody has one. What you are looking for is an informed opinion and I do not have one on that subject.” So let’s go to a couple of sources that offer informed opinions. Rather than stick our head in the sand, exposing very dear parts in some belief there will never be another bad storm, it makes sense to me to be prepared for the worst storm in the country’s history. Such preparation can only help us to be prepared for the next debacle, no matter how severe or benign it might be. Please take a look at this chart.
Nobel Laureate, best-selling author, and Sterling Professor of Economics Yale University Robert Shiller averaged the last ten years of earnings in his work to smooth out wild fluctuations near tops and when earning suddenly crash in major recessions or depressions. Harry Dent, Dent Research said, “Doing this work shows us that we’ve only gone higher twice before,” perhaps for very specific reasons. You can see that the highest peaks are 1929, 1999, and now. “That the 90% crash, the greatest in U.S. history, was just bad luck… a ‘black swan?’ It certainly seems that way. But, then again, most people can only see a bubble with 20/20 hindsight,” said Dent.
For another perspective, please see the chart below that adjusts the Cyclically Adjusted PE Ratio (CAPE Ratio) for GDP growth, which is much lower today than in the terrific 1995-2000 run.
Dent said, “The picture is clear: P/E ratios are higher than ever, and much higher than 1999 when you adjust for lower growth and weaker economic momentum.” Astro-physicist, best-selling author, and professor of theoretical physics at the City College and City University of New York, Michio Kaku, Ph.D., put It this way when we met. Kaku asserts depressions just happen about every 80 years or so.
Just as you must stay alert when you are behind the wheel in your car, avoid being lulled into complacency by experts claiming everything is just fine because you’ll come to rest in financial heaven. Bad things happen to those who fall asleep driving cars. So, don’t be sheep. Pretend the wheels are about to come off the wagon. In this suddenly topsy, turvy world, the question you must answer now is, what can you do today to keep your assets from being handed to you?