Over the past several weeks, the U.S. stock market has taken a pause from its blistering upward run that began immediately after the U.S. presidential election.
Yet, the most recent Investors Intelligence survey — which is a weekly poll of financial advisers conducted to see whether professional investors are bullish, bearish, or predicting a correction — showed that the percentage of bulls rose 3.6 percentage points to 61.8%… that’s the highest reading since June 2014! And that’s compared with the percentage of bearish advisers who logged in at only 17.6%. What’s more, the bulls-minus-bears line sits at 44.2% — its highest perch since March 2015.
What’s going on?
In last week’s Money and Markets article, I explained that most institutional fund managers are suffering from a severe case of the fear of missing out. That’s because performance and money flows talk on Wall Street. And what these indicators have been saying recently is that investors are abandoning hedge funds and some of the leading actively managed stock mutual funds in droves.
In fact, Harvard University’s endowment board was so fed up — after losing $2 billion last year while the U.S. stock market, as measured by the popular S&P 500 index, notched a total return of more than 13 percent — that it recently announced it was getting rid of half of its 230 employees and farming out management of most of its money.
Why? The main reason that investors are taking their money elsewhere is because of poor performance!
Indeed, hedge fund expert Seth Klarman, who manages more than $7 billion in the highly respected Baupost fund, recently said that hedge funds across the board delivered absolute returns of about 23% for the five-year period starting in 2010 compared to the S&P 500 index performance of 108% over the same time frame. That’s shocking underperformance by supposedly the best and brightest in the investment management business.
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So after having had their hat handed to them by the passive S&P 500 index for several years in a row, many professional investors have adopted a “if-you-can’t-beat ’em, join ’em strategy.” And they are now hiding out in U.S. stocks and their related indices, while waiting for some signal about which way the market is headed during the first few months of the President Trump era.
Why? It’s because they simply can’t afford to fall further behind.
So as they sit tight with their stock positions, they report a bullish position hoping that their views can influence investor optimism and propel the market higher.
But here’s the problem with that approach …
It’s often said that a picture is worth a thousand words. So here are three charts from the St. Louis Federal Reserve that show what sank the Obama agenda and left U.S. voters looking for a different way forward in our recent presidential election. And guess what? Despite the Trump administration’s rhetoric and prolific presidential tweets, these macro issues haven’t gone away.
The chart below shows the civilian labor force participation rate (the percentage of working-age population who are actually participating in the labor force — either currently holding a job or actively looking for one). It’s clear from this chart that the overall participation rate has plunged since the mid-1990s, while workers close to retirement have been drawn back into the job market.
This means exactly what you think it does: Outside of workers 55 years of age and older, Americans of working age have 1.5 million fewer jobs today than 15 years ago. This is primarily the result of two factors: (1) the replacement of entry-level and low-skilled U.S. jobs with cheaply outsourced labor abroad, and (2) the zero-interest rate monetary policies pursued by the world’s central banks as a result of the Great Recession have destabilized retirement plans, leaving those near retirement without a safe source of interest income on accumulated savings, so older Americans are working longer.
Next, while U.S. employment has been hollowed out, so too have incomes. Wages and salaries, as a share of GDP, have never been lower.
Yet despite weak incomes, personal consumption as a share of GDP has never been higher. Not surprisingly, the same is true for consumer credit as a share of GDP, as monetary policy has encouraged the persistent accumulation of debt to bridge the gap between income and consumption.
Making things even for more difficult for a Trump administration is that in the last 100 years there has never been a two-term presidency that wasn’t followed, within 12 months, by a recession. But we do live in interesting times, and it’s possible that the world’s central banks will make good on their promises to double down on their experimental economic policies in a way that will kick the can down the road on a recession.
The lesson here is: Don’t let the stock market be your guide in these highly UNCERTAIN times when most stocks are off the chart expensive, especially now … when the market’s being heavily influenced by institutional investors that are just hoping to catch up.
The ONE analyst who accurately predicted the great crash of 1987 … the dot-com bust of 2001… and the real estate collapse of 2008 now says, “Buy stocks with both fists!” Read more here …
Here’s what you should do instead: Watch interest rates as I explained in my January 6, Money and Markets article — specifically the 10-year U.S. Treasury — for your signal as to which way the market is headed.
If it dips significantly below 2.5%, it signals that stocks are headed lower. On the other hand, if it breaks through the 2.7% barrier on the upside, then we are likely going higher on another bull run. And if it bounces around in a range of just over or under 2.5%, it means more of the same.
What should investors do while waiting?
For my Safe Money subscribers, I have put together a core holding of the highest-quality stocks on the globe … I call them the Dependable Dozen. These are companies that can grow through thick and thin and pay a cash dividend to boot that’s comparable to the yield on the 10-year U.S. Treasury.
And if you haven’t already done so, I’d recommend that you sprinkle a little gold into your portfolio when the price is right because it comes with a double-sided benefit: It should provide some downside protection if stocks fall; but if they go on another bull run, gold is a terrific inflation hedge.
Come back and visit next week and I’ll reveal Donald Trump’s insiders’ game plan for the economy and the U.S. stock market. It’s a doozy, and something you just have to know about!