….Are We Being Conned?….
Trump and the republicans need a strong economy and stock to win in 2020. And so far, the economy and record stock market have been supportive. Will the economy and stock market continue to climb in 2020?
- Positive factors:
- Job growth has been good
- Unemployment is near record lows
- Consumer spending is robust
- Inflation is reported to be under control.
- Negative factors:
- World economies are slowing
- Exports are declining. Other countries hate Trump and the republicans. Their citizens, especially China, have been boycotting USA made products and services.
- Corporate income and profit growth have been declining
- We have record government budget deficit, corporate debt and individual debt.
Historically when there has been a slow-down in economic growth and corporate profits, the forward -looking stock market declines. But so far, this has not been the case under Trump. When the markets show weakness, Trump, the Federal Reserve and Wall Street have come to the stock market’s rescue.
In December, 2018, the Dow Jones dropped about 2,100 point or 8%. And it looked like a market meltdown was underway. But the following month, the Federal Reserve announced they would no longer be raising interest rates and hinted they may even cut them. Trump also announced that a trade deal with China might soon occur. And many Wall Street investment advisors, told investors not to panic, saying that lower corporate profits are okay because the Federal Reserve was lowering interest rates. The market fully recovered over the next two months. The same scenario was repeated in the mid-April to May time-frame of his year, when the market again fell 8%. only to recover in June for the same reasons. This was repeated again in August followed by a September recovery. And the market has made new record highs.
These ups and downs in the stock market have left investors complacent, believing Trump and the Federal reserve will be there to “save the day”. And so far, this has been the case. But what could go wrong?
- USA consumers may stop their buying spree. Consumer debt is at record levels. However, the recent decline in mortgage rates will increase access to credit. So in the short run, consumers are likely to borrow more and spend.
- Other countries have been finding non-USA based suppliers. Even if trade wars end, other countries are not likely to “blow-off’ their new suppliers. The stock market, which is anticipating a return of foreign purchasers, is likely to be disappointed.
- Long-term interest rates may rise especially if inflation heats up. The current 2% interest rate on the 10-year note (down from 3.25% in 11/18) is near historic lows. With the record $trillion/year deficits, it is curious this interest rate is acceptable. However, the debt is largely being funded by passive USA investors who may not be fully aware of the risks of holding long-term debt at such low interest rates. These investors are not aware of less risky shorter-term alternatives such as “stable Value Funds” where investors are protected from declines in principal
- Investment by foreigners has been “net neutral”. If China and Japan start dumping their holdings of USA debt this would cause a spike in interest rates.
So whats an investor to do? That’s the big question. Based on historical analysis, one should exercise caution. But the conman may outwit us all and the stock market may see new heights.