Up, Up & Away

The optimism is quite high in the market and in business as the anticipation of Trump bringing changes in government which are pro-business is causing a ‘risk on’ trade to be put in place. I heard Trump say in an interview on NBC that he would cut 80% to 90% of regulations. This would be a massive boon to business growth in America. It is the most obvious and doable lever a president has to grow the economy if he wants to. Trump mentioned the booming stock market after his win. It’s the same market he called a massive bubble a few months ago. At the beginning of Obama’s presidency, Obama expressed bullishness on stocks, referring to sentiment being overly negative. The opposite is the case for Trump entering the White House, but he will not be as honest about his thoughts as he was on the campaign trail. The timing of this election has added to the momentum in the economy because we were at a stalled speed; it’s easier to accelerate from being in neutral than being in reverse.

The economic indicators have mostly moved up since the election as businesses may be anticipating future growth. As you can see from the chart below, the blue-chip consensus for GDP growth started moving higher in early November; it’s now expecting Q4 GDP growth to be 2.3%. The Atlanta Fed GDP Now forecast is expecting 2.6% growth. While the Atlanta Fed forecast still has a month of data left to digest, if the trend of the economy accelerating continues, we could finally have a quarter where the indicator doesn’t decline from the start.

q4gdpnow

The ISM indicator is showing business activity is improving at an accelerating rate. The non-manufacturing index showed a 57.2 reading which indicates annualized GDP growth of 3.3%. The November reading was the highest its shown in the past 12 months. Business activity grew at an accelerated clip, increasing 4.0 points to 61.7.

ismnim

The ISM Manufacturing PMI index is also accelerating as it rose to 53.2 which was the highest level in the past 12 months. There was a mini-manufacturing recession, but that has ended for the time being.

ismpmi

The final positive economic indicator is the University of Michigan consumer sentiment indicator which is at 98.0 (just a tick below the high for the cycle). This big boost in optimism could spur spending this holiday season. Even if the consumer doesn’t have money in her pocket, she could spend extra money on credit in the anticipation that next year will have an improving economy and lower taxes.

consumer

The question investors have to figure out is how this should translate into stock valuations. I am very bearish because the market never was low due to the excessive regulations Obama put in place. Yes, the GDP growth was lower than it could have been and other economic indicators were subdued, but the market never reflected this. It would be like if Apple stock never went down from the decelerating sales growth and then skyrocketed after re-acceleration came from a new device.

When you have a market that goes up based on slow growth and then goes up based on anticipated growth, you get a market with bubble valuations. The Shiller PE is now at 27.94 which has only been beaten by the 1920s and 1990s bubbles. In the 1990s the economy had accelerating growth. If the economy does grow 3% in 2017, I can see a scenario where the market gets close to the 1990s bubble valuations because of the QE driven liquidity and low interest rates.

shiller

CNN has a Fear and Greed Index which measures some market indicators to determine market sentiment. In theory, fear would be a buying opportunity and greed would be a selling opportunity, but stocks can always go further than you think they can go. The indicator is at 86 which shows extreme greed.

fear-and-greed

I think the index is under-representing the greed in the market because it has the VIX as a neutral indicator. The VIX is neutral because it is only slightly below the 50-day moving average. However, this is a flawed way of looking at it. The VIX is an index which should be looked at in terms of history because there’s nothing that makes it any different now than the past. It’s not like the equities market which generally should go up overtime. As you can see from the chart below, the VIX is near the lowest it has ever been. A VIX with an 11 handle is an indicator which shows complacency. If the VIX contributed to the index as greed, then it would be well into the 90s.

vix

My point in highlighting the recent positive economic trends is not to express a bullish opinion on stocks. As you can see from the consumer sentiment indicator, it spiked right before the recession in 2008. It’s possible to recognize the positives while using valuations as a guide for where to put your money. Valuations aren’t always the best for market timing because stocks can be expensive at the bottom of the cycle because earnings are at their trough. The Shiller PE eliminates that effect by looking at 10-years of earnings history. This is not a factor in today’s market because we aren’t coming out of a recession.

Conclusion

            This week has had optimism unlike I’ve ever seen with all major indices near their all-time highs as Trump is expected to bring growth back to America. It’s amazing how Trump was feared by economists and investors and is now being welcomed with open arms. I always believed Trump would have a better chance to bring capitalism to America than Hillary, but I have been mistakenly bearish because of the Fed created bubbles. At this point, I see no headwinds between now and inauguration day, so stocks may continue their momentum for the next 4 weeks.

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1 Comment

  • Gordon Gulitz

    December 11, 2016

    Mr. Trumps description of the stock market as "a bubble" v. "booming" is just one example of his bipolar nature.