Dow’s New Record Raises Fear – NOT Optimism

Guest Post from:  Luis Aureliano

Regardless of whether it was Boeing or Apple’s latest positive earnings that pushed the Dow Jones Industrial Average (DJIA) above 22,000, this latest milestone is cause for concern – not optimism.

 

The index’s most precipitous decline in the last year was May’s dip of around -1.50%, and the blue-chip benchmark has only grown since then. This 8-year bull market, one of the longest in U.S. history, has shown no signs of stopping. However, its inertia only increases the likelihood of a correction, which is defined as a decline of more than 10.00%. At this point, the Dow would have to lose 2,200 points for the event to be termed as such – yet this notion is less far-fetched than many believe.

Sentiment Says It All

 

The biggest indicator of U.S. economic success, gross domestic product, advanced a reasonable 2.60% in the second quarter of this year, but those who take a broader view can see how mediocre this truly is. Average GDP growth in the 1960s was almost 5.00%, and in the 1990s it was 3.60%. Despite a clear downtrend, many prefer to bury their heads in the sand.

Sentiment seems to be in the driver’s seat when it comes to equity growth in the U.S., as there is little fundamental evidence for booming domestic expansion. Traditionally, good corporate earnings are not enough to sustain a rally of this size – and many believe that it is largely the growing global economy that continues to push U.S. stocks higher. Companies who are responsible for the Dow’s latest achievement, like Boeing and Caterpillar, receive most of their sales from abroad.

Development in emerging markets and low inflation has helped U.S. companies to export more, which pads the coffers but does little else. Additionally, many firms are taking advantage of low borrowing rates to fund inexpensive buybacks of their own stock, inflating the numbers further. As investors see that numbers are consistently in the green no matter their underlying value, they pile on for fear of missing out, despite a looming precipice.

Presidential Promises

 

Some of the blame lies with President Donald Trump, who took office when the DJIA was around 18,000. While he may take credit for this 20.00% advance, he only deserves some of it. Mr. Trump burst onto the scene with lofty promises of deregulation and tax cuts, which saw a lot of support, but his aspirational legislation has thus far failed to surface. Apparently, investors relied on sentiment for their equity incline, but did not apply the same logic when Trump was revealed as politically impotent.

The trend of companies to put share price above all else is great for stock market participants, but these people are increasingly in the upper tiers of society or are simply institutional investors. The former category of people can live on capital gains, while the latter use their profits to fuel a meta economy that is driven mostly on debt, and provides little upward mobility. Trump’s plan to spur jobs growth with infrastructure spending and decreased taxes may have been a potential solution to these problems, but they are not forthcoming.

Consumers are the real drivers of economic growth, and it is the American consumer that is getting the short end of the stick. Recent data illustrates that consumers without the money to fund their lifestyles or weaker credit, are doing so with tools like the plethora of credit cards offered by banks. While this has so far worked well, thanks to user-friendly issuers and lenders such as Credit One, SoFi and others which helped underserved individuals less-than-stellar credit, the first quarter of 2017 saw household debt rise to $12.73 trillion. This eclipses the infamous credit bubble that heralded 2008’s financial crisis, but it is yet unknown if this is a sign of impending financial trouble or not.

Hazy Horizon

 

While nothing is certain, many agree that the United States is overdue for a stock market correction. More unclear is this correction’s potential catalyst, and though there is a long list, the status quo is being stubbornly upheld by the political elite, banking institutions and international corporations. Individuals must look at the trends and determine whether to take a risk-off approach, or to cling onto the bandwagon with the rest of the herd.

 

Thanks to:  Luis Aureliano, a business writer and financial analyst. With over 15 years of experience in global finance and an MBA in economics and management, Luis’s areas of expertise include business, marketing, communications, personal finance, macro economics, stocks and emerging markets.

 

Gary Christenson

The Deviant Investor

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