@theMarket: Will This Year Be Like the Last One for Stocks?
It is that time of the year when fortune telling becomes a popular past time in the financial markets. Every Wall Street strategist releases their projections for the economy, the markets, and earnings for the New Year. What strikes me about 2020's crop of predictions is their similarity.
My own informal survey of analyst's forecasts seems to converge around a 1.8 percent-2.0 percent prediction for economic growth in the U.S. Earnings, for the most part, hover around the unchanged mark, or slightly better. These professional forecasters are looking for no more than average gains in the rate of return (ROR) for stocks based on the equity benchmark index, the S&P 500. What does that mean to me?
On average, over the past 150 years or so, the S&P 500 Index has returned roughly 4-5 percent. If you add in dividends, that ROR increases to 6-7 percent. You can read these consensus forecasts in one of two ways. They could mean that none of these people, who are paid to forecast, really know what the stock market is going to do next year, so they are hiding behind an average return. If they are wrong, they can always point to the fact that, from a historical perspective, the markets should have at least provided that much in gains.
The second possibility is that all of these high-paid Wall Street pundits actually believe their forecasts, in which case, as a contrarian, I worry that with everyone leaning to one side of the boat there is a chance that the markets will do something quite unexpected. If that is the case, you have to ask "Will stocks perform better, or worse, than the average?"
Ask yourself what could go right (or wrong) for the economy and therefore the markets in 2020. First of all, we are entering a new decade. The last one was wonderful for stocks. The chances of a repeat performance in the Twenty-Twenties could happen, but I doubt it. Physics would tell you what goes up, must come down, but who says it has to happen next year?
For me, the largest risk out there in 2020 is a spike in inflation. This year, wage growth finally exceeded the inflation rate. It took the entire decade to get there, plus trillions of dollars of global central bank monetary stimulus. That stimulus is still going on and, according to all these strategists, should continue into next year on a worldwide basis.
If I accept that the U.S. economy will continue to muddle through, and unemployment will continue to remain at record lows, one could expect wage growth to gain even greater momentum. And wage growth, my dear reader, is the main engine of inflation in this country.
In addition, we could actually see economic growth higher than what the economists are predicting, because it is an election year. No one can predict what politicians will do, or who will win an election this early in the political cycle. Yet, the market's performance will depend on not only who wins, but prior to that, who is perceived to be winning.
However, I can confidently predict that neither political party will be willing to reduce government spending in 2020. In fact, the opposite almost always occurs during a presidential election year. We are already witnessing both parties "coming together" to pass a flurry of legislation (including a spending bill) at the end of this year. I expect to see more of that in 2020. More spending should equal more growth, more growth means higher wages, etc.
Then there is the Trump trade war. Everyone seems to be predicting more of the same: tariffs will remain, Trump will continue to use trade to get what he wants, and. as a result, business confidence and investment will remain subdued, thus the "muddle through" economic forecast. What might happen if the president switches tactics?
Donald Trump has two things going for him when it comes to voter sentiment. Even those who hate him believe he has done a good job on the economy and the stock market. The only thing that has held back even stronger growth, people believe, is his trade wars. If he were to change his tactics, shelve the trade war for nine months, and work to expand the economy through government spending, then what?
The economy may grow faster than expected. Global growth could get a boost. Emerging markets might benefit, as would other overseas markets. As a result, Trump would probably win in November, because no matter what Americans say, they tend to vote with their pocketbooks.
Stronger economic growth, both here and abroad, a historically low unemployment rate, and the inability (thanks to Trump's immigration policies) by companies to hire the skilled labor they need, would mean more wage hikes. That would translate into higher consumer spending, higher prices for goods and services, and maybe, just maybe, the inflation cycle begins.
In my next column I will pursue this line of thought and provide some other scenarios that could play out in the New Year. Until then, have a most wonderful New Year.
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The Independent Investor: Investors Ignore Impeachment
Abuse of power, obstruction of Congress; these are accusations that ordinarily evoke sharp emotions among Americans. Yet, the financial markets have barely blinked, if they have paid attention at all. Why?
The short answer is that investors have done the numbers and calculated that Donald Trump has less than a snowball's chance in hell of being impeached by the U.S. Senate. For those who don't follow the actual political process of impeachment, once the Congress voted to impeach the president, the next step is up to the Senate. They are required to hold a trial to decide whether to remove him from office. A two-thirds majority is required to convict and then remove the president from office.
Trump is only the third president (after Andrew Jackson and Bill Clinton) to be impeached by the House. However, Trump's predecessors were acquitted in the Senate. And therein lies the reason investors are ignoring the event. Republicans hold the majority of seats in the Senate (53 seats). In order to get a conviction, 20 Republicans would need to join the Democrats' entire minority of seats to pull off a palace coup. That's not likely to happen.
Now, while the country is roughly split down the middle by those who believe impeachment is the only solution to end the reign of America's Mad King, an equal number of Americans believe that President Trump is an innocent victim who is being nailed to the cross of political partisanship by the Democrats. None of that matters to the markets.
The only question financial markets care about is "can money be made from this event?" Given the answer is no, (not directly) global traders focus on things that can provide an immediate return. Next month it will be the chances of a Brexit, the signing of a Phase One China/U.S. trade deal and the prospects for earnings in the first quarter.
I understand that the market's disregard of social issues rubs many Americans the wrong way. To be sure, it bothers plenty of Wall Streeters as well, but righting wrongs is not the mission of financial markets. It never has been.
Plenty of people, including the president, in my opinion, get confused on this point. Every time the stock market hits a new high, a tweet from the White House follows shortly thereafter. It appears that the president attributes the market's gains to some policy or action he has taken or may take. His view is that the market is a better and more accurate indicator than voter polls. And he is correct, as long as the action or policy is something investors perceive will move the market. Good or bad, traders will respond, otherwise it is ignored.
Markets don't care if immigration policy is changed, for example, unless it has an immediate impact on prices. Trump can fill containment camps to the brim. He can kill, maim, and starve whomever he wants, but markets won't care unless money can be made (or lost) over it. Markets do not approve or disapprove of the impeachment of President Trump. They just don't care.
That's why financial markets need to be regulated. If the most profitable business in the world is building and selling nuclear weapons to terrorists, the markets will do it, if they can get away with it. It is society's responsibility, through their governments to make sure that does not happen. Right now, few if any market participants are enamored with either Bernie Sanders or Elizbeth Warren.
Both candidates are proposing policies that Wall Street fears might curtail or change the game for everyone in the economic arena. People in the financial markets worry that they will make less money, or worse, actually lose money, if either are elected. As such, they will oppose everything those candidates do.
It is nothing personal. In fact, some trader or other might actually approve of their social platforms. And if suddenly one of them proposed something that could make investors lots of money, you would see Wall Street change their tune. It is the nature of the beast, so you might as well get used to it.
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@theMarket: Market Melt-Up
Officially, the Santa Claus rally has not even begun. And yet, almost every day over the last two weeks stocks have climbed higher. Unlike last year, there appears to be nothing stopping the market from continuing to make new highs at least into January.
Historically, the Santa rally begins on the day after Christmas and stretches through to the second day of January. The fact that last year he failed to make an appearance might mean that the jolly old elf could be making up for lost time by coming in early.
The markets action is especially impressive since this is the time of the year when investors usually sell their losers in order to establish a tax loss for the year. Large institutional investors and mutual funds do the same thing. But that selling pressure has been met with buyers, which is supporting the market.
There are two recent trends that are keeping things bullish. The first is the Phase One trade deal breakthrough. Despite its lack of substance, it does reduce some of the uncertainty in the markets even though the final deal has yet to be signed.
The second, and more important development, is the Federal Reserve Bank's injection of over $425 billion into what is called the "repo market." It is the market that provides critical short-term funding for banks in need of cash to settle certain end of year obligations in their day-to-day business. The Fed actually provides cash to financial institutions in exchange for some of their U.S. Treasury bond holdings.
Although the Fed won't say it, what they are doing is a form of quantitative easing or "QE" that reduces the cost of borrowing money as effectively as if they cut interest rates. In the past, the Fed has used QE in order to stimulate the economy. And every time the Fed eases monetary policy, the stock market responds positively.
On Monday alone, the New York Fed increased the amount of its bond buying by $86 billion. We could see a like amount on Dec. 30 through Jan. 1, 2020, according to Fed watchers. When all is said and done, the month of December central bank monetary stimulus could total $500 million. That is not chump change.
And before we forget, there is also the "January effect" just around the corner. Historically, January is the best performing month of the year. That's when folks on Wall Street usually receives their bonuses, and a lot of that money goes right into the stock market. In addition to the bonus play, a lot of those stocks I mentioned that are sold about now for tax losses are repurchased in January, especially in the small cap arena.
The likely results of all these beneficial trends this month and next should provide pretty good support for stocks. I would like to see a bit of a pullback in stocks (30-50 points on the S&P 500 Index) between now and Christmas, however, just to relieve some of the overbought conditions. That could set us up for a sprint to the upside in the markets after Christmas through the end of the year.
There are some investors who raised cash a few weeks ago, betting that Trump would not sign a trade deal, more tariffs would be introduced on Dec. 15 and the markets would plunge. That was the wrong move. Now, they are waiting for a pullback to get back in.
Of course, markets usually do what is most inconvenient for the greatest number of investors, so we could conceivably just grind higher and higher forcing those on the sidelines to capitulate and buy back in.
You don't have that problem, readers, because you have been following my advice and remaining fully invested. That had paid off nicely. In my next column, I plan to throw the bones, (as I do every year), and see how 2020 will shapes up, so don't miss it.
In the meantime, have a Merry Christmas, Happy Hanukkah and for those who can, spend it with your families and loved ones.
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The Independent Investor: Business of Santa Claus
As we approach that most joyous of holidays, the image of Santa Claus greets us in every nook and cranny. From television commercials to internet greeting cards, "Jolly Old St. Nick" is a ubiquitous figure. What you probably didn't know is without American business there probably wouldn't be the Santa Claus of today.
Santa and business go back a long way, but before you ask, the answer is no, Coca-Cola did not invent Santa Claus, although they will celebrate their 100-year anniversary in 2020. This modern-day, cherry-cheeked, fat elf of a figure has been best buds with the owners of many U.S. enterprises. Montgomery Ward, Macy's, F.W. Woolworth, General Electric and dozens, if not hundreds, of other businesses have made Santa the elf he is today.
Back in the day, "Sinterklaas," the Dutch name for a monk named Saint Nicholas, was the stuff of legends. His kindness and compassion were his claim to fame among the Christian faithful, and through the centuries he became known as the protector of children. His myth emigrated to America from Europe in the early 1800s.
Christmas at that time was a great big drunken party over here, especially in New York. Remember, it was the beginning of the Industrial Revolution, and the differences among the social classes in the U.S. was as large as it is today. Bands of tough, working-class young men, rowdy and often-times angry, would roam the city blocks, going from home to home, demanding
handouts from the rich. Often, these gangs would "wassail" (sing) bawdy tales at the top of their lungs in the process.
History credits a number of figures, from John Pintard of the New York Historical Society, to Washington Irving, to Clement Clarke Moore, who took it upon themselves to "tame" Christmas for the American masses. "A History of New York," published in 1809 by Irving introduced a more benevolent St. Nick, while the 1822 poem, "A Visit from St. Nicholas" ("Twas the Night before Christmas") by Moore attempted to hone in on the exact time and date of the modern-day legend we call Christmas.
The American version of Christmas continued to expand through penny press publications and women's home magazines. These publications were an early version of both marketing and advertising. The notion of Christmas trees, for example, can be traced back to Godey's Lady's Book that featured Queen Victoria and the royal family gathered around one such tree.
In 1841, a Philadelphia store created the first Christmas blimp of sorts (a life-sized model of Santa) as a marketing effort to draw kids and their parents into their store. In 1862, Macy's introduced the first "live" Santa. An army of Santas soon followed, creating an entirely new business in America. But Santa still lacked the vigor of today. He was most often depicted as a small, elf-like figure, grim and serious (sort of like the Grinch with a red suit and a white beard).
It took the marketing efforts of Coca-Cola to transform Claus into the Santa of today. He was first featured in Coke's advertising in 1920, and within a decade became a staple of their holiday advertising. The company hired an illustrator, Haddon Sundblom, to create a more "wholesome" image of the big guy that would sell in America. It worked so well that just about everyone adopted Coke's version of Santa Claus.
But Santa isn't the only figure that business created. Rudolph the Red-Nosed Reindeer was a marketing effort by the department store, Montgomery Ward. They used one of their own copywriters, Robert May, to write a children's book that the department store could give out to the children of their customers. Millions were given out in the first year, and many millions more have been published since then. In 1949, May's brother-in-law wrote a song, based on the book, that is now part of holiday history.
So, the next time you want to complain about all the bad things that big business does to this country, take heed. There are some things they do well. If it wasn't for business, Christmas in America — gift-giving, Christmas trees, ornaments, dinner, caroling, holiday cards and all that family love — would probably not exist.
And on that note, "Merry Christmas to all, and to all a good night!"
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@theMarket: The 'Apprentice' Manages the Markets
Where to begin? The China trade deal, the UK elections, the impeachment of the president? Let's not forget the agreement on a new North American trade deal as well. It was a heck of a week and Donald Trump flawlessly controlled the news flow.
Boris Johnson, the Conservative Party leader and prime minister of England, won the greatest majority since Margaret Thatcher on Thursday evening. That is good news for the United Kingdom. His victory also supercharges hopes that a Brexit deal can finally be accomplished in 2020. The British pound skyrocketed over 3 percent on the news, and the London stock market was up 2 percent as well. Good news.
The replacement for NAFTA, called the United States-Mexico-Canada Agreement, or USMCA, is also moving forward after over a year of negotiations between the Democrats and the White House. Environmental issues and U.S. safeguards concerning our labor force that worried the Democrats seemed to have been ironed out. Another good news development.
The next step will be for the Trump administration to submit ratifying legislation to Congress, so the new trade deal can finally be passed into law. After all the claims that NAFTA was the worst deal of the century by the president, the new deal is substantially the same as the old one. It may mean 50,000-75,000 additional jobs for the American auto sector over time, and some of our dairy producers will have a little more access to Canada. Overall, the deal, while positive, is simply another example of smoke and mirrors but should play well for both sides in the 2020 election campaign.
But the real news occurred simultaneously — the impeachment vote of the president and the on-again, off-again China trade deal. Announcements of both events occurred on Friday morning, almost at identical times. The Democratic-controlled House Judiciary Committee voted to proceed with the impeachment of President Donald Trump. He is only the third president in the history of our nation to be impeached. It was no accident that the House Judiciary Panel's vote was delayed until Friday morning when prime time television viewers were at their highest.
But the Apprentice was working behind the scenes. On Thursday afternoon, when the impeachment hearings at the House Judiciary Committee had reached a crescendo, Trump and his men met to ostensibly decide on whether to implement a new round of tariffs in the China trade war this weekend. Shortly thereafter, Trump once again announced (he did the same thing nine weeks ago) that a deal had been agreed to by both China and the U.S. The stock market exploded on the news and finished the day a percent higher. The event was pure theater.
Trump's strategy on Thursday, in my opinion, was to pre-empt the Judiciary Committee's televised vote on impeachment and switch the news focus back to him and to a trade deal, no matter how meaningless. But the Dems outsmarted him. They postponed the vote until Friday morning.
Wall Street (and the nation) has been snookered too many times by Trump and his tweets of misinformation and "fake" announcements on the trade deal to take anything at face value. At this point, Trump's words carry no weight, other than as a reason to move stocks up or down for a few hours. On Friday, investors were going to wait and see. There is no deal, they reasoned, until the Chinese agree, and the papers are signed.
Friday morning, the Chinese Ministry of Commerce in a press conference in Beijing, announced that there was a deal from their side. Trump confirmed the agreement a few minutes later in a tweet. Both sides said the U.S. would be rolling back the tariffs already in place over a period of time. The tariffs scheduled for Dec. 15 would also be canceled.
Investors were so busy following the trade news that hardly anyone noticed the House vote. Mission accomplished as far as the president was concerned. While the announcement is good news from a business sentiment point of view, the actual details will likely have little impact on the economy or earnings. The U.S. will still keep 25 percent tariffs on some imports and 7.5 percent on others. It does, however, give Trump another "victory" to run on in his 2020 campaign.
As for the markets, the final announcement proved to be less than bullish for the markets. Most investors saw right through the Phase One deal. As a result, markets reacted with a typical "sell on the news" event. By mid-day Friday, the markets were all down modestly. And so goes another day in this market. I still believe that we will continue to move higher into the New Year. Next year, however, may be another story.
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