‘Dumb Money’ Most Bullish 2000

The S&P 500 rallied 0.72% on Tuesday, ending the sell-off which was driven by the GOP’s failure to deliver healthcare reform. The hope trade is not going away easily even though many of the market supporting factors have gone away or gotten weaker. The stock market is like a Jenga game. Taking away healthcare reform was like taking a block out of the wooden structure; it wobbled for a few days, but it didn’t fall. The weak core durable goods orders also took a block out, but nothing came of it. The chart below shows the bulls are defending the Russell 2000’s four-month range. It increased 0.70% on Tuesday; the period where the Russell 2000 was down year to date was very short.

One of the driving forces behind the stock market rally since the election has been the ‘dumb money’ or the non-professional investors. These investors usually buy and sell stocks at the worst times. Even though I was bearish in early 2016, the one part that didn’t fit in the bearish puzzle was that the ‘dumb money’ wasn’t optimistic. The chart below shows the Conference Board’s survey of Americans compared to the Nasdaq. Everyday Americans were extremely bullish at the top of the Nasdaq bubble. Now that the Nasdaq has surpassed its dot com bubble high, the percent of Americans expecting higher stock prices in the next twelve months is at almost the same level.

I find it interesting that this survey has been in the thirties for most of the past sixteen years even though stocks usually increase every year. Even at the end of the longest bull market in history, only about fifty percent believed stocks would rally. Either some Americans had a sense stocks were too expensive or most Americans had little understating of how the stock market works. Personally, I wouldn’t put my retirement savings into a vehicle that I didn’t understand, but the average American wants to chase performance. If you have followed stocks regularly for years, you can try to notice how your friends who were never interested in stocks suddenly are trying to speculate in stocks they don’t understand.

In past articles, I have wondered if the GOP’s healthcare failure would hurt consumer confidence. The latest Conference Board Consumer Confidence survey does nothing to tell us if my thesis was correct because the cutoff date was March 16th. The stock market did not care about this detail as it rallied in response to the latest great report. The failed healthcare reform will impact whether some Americans believe the country is headed in the right direction. I am wondering how much of an effect it had. For now, ignorance is bliss for the stock market as it increased after the Conference Board’s Consumer Confidence Index was reported to have increased to 125.6 from 116.1 in February. This beat expectations for a reading of 114. The Present Situations Index increased 8.7 points and the Expectations Index increased 9.9 points. I am expecting this to be the peak report in the cycle because of the recent government blunders.

One minor piece of evidence I have is the Real Clear Politics average of polls, which ask what direction the country is headed in, have moved lower in the last few days. The net percentage of those who think America is on the wrong track increased from +12.7 to +14.2 as you can see in the chart below. The Rasmussen rolling average poll had a four-point move towards the wrong track in latest update.

As I mentioned previously, the consumer confidence reports have been polarized by political preferences since the election. This polarization may have always existed, but it was easy to point out after the election because Republicans became more optimistic and Democrats became more pessimistic. This aspect has made me less likely to rely on the poll to determine the health of the economy. However, the market still relies on the surveys. Therefore, if we can predict the direction of the surveys, we can predict where the stock market is headed.

According to the latest Conference Board Report, the Democrats’ Expectations Index was 55.3 and the Republicans’ Expectations Index was 122.4. If the Republicans become more pessimistic, the index will move dramatically lower and vice versa. The approval rating of President Trump gives us insight into where the Consumer Expectations Index will go. In the past few days, the number of Americans who strongly approve of President Trump has fallen. This means the next Conference Board survey may show weakness. The President’s job approval is clearly not perfectly correlated with consumer confidence because his approval was low in mid-March, but confidence was still high.

There may be a delay in how the changes in faith in the government effect investing and spending habits. It’s contradictory to be buying stocks and consumer goods hand over fist if you think the country is headed in the wrong direction. Some investors haven’t put ‘two and two together.’ The catalyst to making this connection will probably be when the labor market weakens. This is why I have been focusing on the jobless claims so much. They spiked last week, but the four-week average is still low. This means the start of the next bear market may still be a few months away.

Conclusion

I could be wrong in making the assertion that the stock market has rallied on Tuesday because of the anticipation of tax cuts and the great Conference Board survey. It could just be dip buyers who are buying stocks because they believe stocks always move higher. This is in tune with my point that the ‘dumb money’ is driving the market higher. If stocks are reacting to consumer confidence surveys, the market may fall when the surveys for April and late-March are released because approval of the government is falling due to the inability to pass healthcare reform. You could argue that many people didn’t want the GOP’s healthcare plan, but those Democrats who like Obamacare always were against Trump. There may be a new cohort of disaffected Republicans who are displeased with the inability to fix the problems with Obamacare.

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