of Decade Review of U.S. Economy and Financial Markets
By the Curmudgeon
This is the first of a two-part series examining the U.S. economy and financial markets for the last 10+ years. The second article will be published next weekend, with Victor joining me to provide his usual no holds barred comments and incisive on target analysis.
Investors never had it so good! Since March 2009, U.S. stocks have compounded at a 14.4% annual rate, twice the rate of the last century. U.S. bonds have returned more than 9% a year, triple the historic pace. Adjusted for risk, as measured by annual volatility of returns, the past 10 years have been the best in the past 100 years (Source: Morgan Stanley Wealth Management).
U.S. Stock Market vs the Economy:
As of the Friday, December 20th close, the S&P 500 Index YTD total return is 31.05%, according to y.charts.com. At Fridays close of 8,924.96, the NASDAQ composite has a YTD gain of 34.51%.
It seems like the S&P and NASDAQ continue to make new all-time highs almost every day even on days where there is very bad political and/or economic news. Instead, we hear never ending tales of a goldilocks economy and an unstoppable, never ending bull market that is immune to the diminishing power of bad news.
To be sure, the stupendous gains in stocks are NOT the result of a strong economy. To the contrary, while the U.S. has a 3.5% unemployment rate, the lowest in 50 years, GDP growth has averaged 2.1% a year over the last decade, versus a long-term average of 3.3%.
United States GDP Growth Rate
Because of demographics and the growing share of older workers that have given up looking for a job, the labor-participation rate (63.2% as of November 2019) remains four percentage points below the post-World War II average. Real wage growth (i.e. after inflation) has been modest, averaging only 1.6% a year. Productivity for the 2010s has been lackluster, which is likely due to anemic capital investment (aka CAPEX) which has offset companies using more efficient and cost-effective technologies.
U.S. labor productivity decreased 0.2% in the nonfarm business sector in the third quarter of 2019 and dropped by 0.82 % YoY in Sep 2019, the last month for which figures are available.
Note: U.S. Labor Productivity Growth data is updated quarterly by the US BLS. It is a measure of economic performance that compares the amount of goods and services produced (output) with the number of hours worked to produce those goods and services.
Disconnect Widens to Unimaginable Levels:
When we started writing the Curmudgeon, 15 years ago (after the market recovered from the dot.com bust/telecom crash and started a new bull move), we noted the huge disconnect between the economy and stock prices. We never imagined it could get much wider, let alone reach the stupendous disparity of recent years. The past year has been most improbable, with three consecutive quarters of YoY negative earnings growth even though profit margins and profits as a percent of GDP are and have been all-time highs. Yet the stock market didnt seem to care or even celebrated the earnings recession with popular averages up over 30%!
What accounts for this great disconnect and stupendous increase in P/E ratios, which would be even higher without share buybacks?
We think its a combination of: the Fed and other central banks ultra-easy monetary policies which provides stupendous liquidity for financial assets, negative overseas interest rates (and negative real interest rates in the U.S.), corporate stock buy backs, huge short liquidity trades, computerized trading based on key words in social media and the news, ETFs being used as highly leveraged derivatives [as per Tim Quasts comments in Curmudgeon: S&P 500 Forecasts Bullish but Prices Bolstered by Buybacks and ETFs, Not Earnings (12/08)], and other factors that we dont understand.
Sayings which were once ridiculed, but may now be true:
The four most dangerous words in investing: this time its different, by Sir John Templeton (founder of the Templeton mutual funds).
"The old rules no longer apply."
"Risk is off the table. Count on it."
Buy the dip. [See below for counter-argument]
Every dip is a blip in a never ending bull market.
Prudent sayings which may now be invalid:
Buy into fear, sell into greed
Always sell too soon, by Baron Rothschild (then many others repeated this saying).
Take profit when your stocks % gain hits your target.
Do not buy into a steep correction, because it could likely be the beginning of a bear market
It would be wonderful if we could avoid the common setbacks with timely exits, Peter Lynch, Fidelity Magellan fund manager.
And finally .
Markets get old too. [Quintessential Victor Sperandeo interview with Jack Schwager published in New Market Wizards starting on page 293.]
Good luck and till next time
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
Copyright © 2019 by the Curmudgeon and Marc Sexton. All rights reserved.
Readers are PROHIBITED from duplicating, copying, or reproducing article(s) written by The Curmudgeon and Victor Sperandeo without providing the URL of the original posted article(s).