U.S. stocks have been on a tear since the beginning of the year, with the popular S&P 500 stock index up approximately 6%, setting record high after record high on its recent run upward.
Consider this: So far this year, the Dow and the S&P 500 have logged 10 record closes, while the Nasdaq has scored 19, according to Dow Jones data.
Indeed, the pronounced strength of the stock market since the election of Donald Trump as U.S. president in November has left most media pundits astonished.
But not me!
What’s more, the mainstream financial media are attributing most of this upward move to the pro-growth polices the Trump administration has promised to pursue — including tax cuts, deregulation and a significant infrastructure-spending program. A combination of which is expected to accelerate economic expansion and lift corporate profits.
But the mainstream media are way off base about what’s fueling this market surge!
Why? It’s because they are focused on the wrong market metrics.
|Everyone’s so happy about the booming stock markets that they haven’t bothered to figure out what’s behind the super-rallies.|
There’s one market statistic that’s been the primary factor responsible for this record market move higher, and I revealed it to you in my January 6 Money and Market’s article. In fact, in that article, I told you I would be “watching it like a hawk” and using it as my signal about whether stocks were headed higher or lower.
And that one statistic is the bellwether 10-year U.S. Treasury yield. That’s because this crucial interest rate has an influence on returns across the entire financial market food chain.
As we headed into 2017, the 10-year yield stood at 2.45% and despite the big run-up in stocks it’s barely budged … recently closing at 2.43%. That’s a barely noticeable change of only 2 basis points over the course of the year!
This means that current 10-year U.S. Treasury buyers are exchanging their precious investment capital for a cash coupon payment of 2.43% and the return of their original investment ten years from now with NO HOPE FOR GROWTH in either the coupon payment or the capital investment returned at the end of their 10-year holding period.
Now, compare the 10-year Treasury return to the S&P 500. With the dividend yield on the S&P 500 hovering around 2%, investors committing their hard-earned capital to the benchmark U.S. stock index are going to receive a regular cash dividend payment of about 2% annually and, more importantly, the HOPE FOR FUTURE GROWTH of both the dividend payment as well as their capital investment.
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It’s a powerful one-two combination: Growth in both the cash payments and potential appreciation on the amount invested.
It’s that simple: Growth versus No Growth. In a stable interest rate environment with a comparable starting cash yield — 2.43% for bonds, compared to 2% for stocks — long-term investors will choose growth every time. And that’s what’s driving stocks higher!
But aren’t interest rates headed higher?
Yes, but only on the short-end of the yield curve. Sure, Janet Yellen and the Fed can hike the short-term interest rates and declare victory by raising the Federal Discount Rate a skimpy 25 basis points at a time — and you can be sure that the media will make a big deal about it — but the Fed can only go so far without risking harming the economy and jeopardizing the heavy lifting that’s already been done by their colleagues around the world to save the global economy.
So, should you jump into the stock market now?
In my Safe Money Report, I am recommending that investors sit tight with their current positions – a core of carefully selected high-quality stocks, a big chunk of cash, and market hedges.
Here are three reasons why:
- It’s been more than 50 trading days since the S&P 500 had an intraday trading move of more than plus- or minus-1%.
- S&P 500’s 166-day streak without 5% pullback is longest since 2007.
- Ned Davis Research reports that it’s been 2,000 days — that’s about 5½ years — since the U.S. stock market suffered a 20 percent decline or more.
To put this in perspective, Ned Davis says that since 1928, the average number of days before a correction of more than 20 percent occurred was 635 (or every two years or so). For those even more detailed: In secular bull periods, the average number of days was 1,105. In secular bear periods, the average number of days was 486.
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That means that the current case of 2,000 days without a correction of at least 20 percent is MORE THAN THREE TIMES THE AVERAGE. And that’s for the entire 89 years from January 1928 to February 2017!
Now, for me, that’s enough of a reason to sit it out for a bit and keep a boatload of powder dry.
So, don’t let the current becalmed conditions lull you into complacency. With an unconventional commander-in-chief occupying the Oval Office, we’re sure to see plenty of UNCERTAINTY surrounding his economic, social, and geopolitical policies. In last week’s Money and Market’s article, I laid out the upcoming geopolitical calendar for you and it’s full of potential landmines.
Hold onto your hat because I expect to see a significant stock market stumble soon. For profit-seeking investors, that means it’s time to prepare yourself both emotionally and financially so you can use the pullback to your advantage and use it as a buying opportunity.
That’s because with President Trump and his administration pushing a pro-growth economic agenda and with intermediate and long-term interest rates stuck in a circular feedback loop, stocks are the only way to go … but not at these prices. Shop carefully!