Where are We and So? - Weekly Blog # 602

Mike Lipper’s Monday Morning Musings

Where are We and So?

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –

All too often those commenting on the stock market and the economy are either out of date or clueless about important changes. One of the more instructive research exercises is to review the prognostications and analysis written between September and December of 1929. While most histories focus on October 1929, few note that by December the Dow Jones Industrial Average had already returned to its October peak. This lack of understanding and its implication is similar to the six-month period after the murder of the Archduke, where troops did not start to position for open conflict until six months later. This period has been called the phony war.

As of this weekend all three of the US stock market indices are at record levels after a twelve-year climb. Currently, I don't know what this means, hopefully a subscriber or their advisor can share their wisdom on what this means for the future. My lack of clarity is based on conflicting views of the data. The averages and many diversified equity mutual funds are showing gains of over 20% year to date. While not the highest on record, these are extremely good results. The gains are more than double the long-term gains of the S&P 500, with dividends reinvested, since 1926. Typically, high valuations are caused by the sudden entry of new money from unsophisticated investors into the equity market. Due to the lack of enthusiastic volume on the upside this does not currently appear to be the case.  Additionally, there have been significant flows into fixed income funds at low interest rates. These investments could lead to total return losses when rates rise.

The other issue driving performance is the belief that better markets lie ahead. This is clearly possible, but it won't be easy. For it to happen two partially interrelated events must occur. There needs to be sufficient tariff and trade relaxations and the Chinese economy needs to begin to grow at close to prior rates. Without China's growth, global GDP growth is likely to be quite modest.

The problem facing most advanced economies is that their political leaders are focused on elections and the biggest group of voters work directly or indirectly for the goods-producing industries. (If global trade issues modify, value investors who own goods-producers may benefit). However, in the US and other advanced economies, most employees and entrepreneurs are in the enlarged and growing service sector. For political reasons, many governments are not overly friendly to this portion of the private sector

Technology can continue to spur national and international growth if government policies don't retard growth too much. However, there are a series of hurdles that must first be jumped. Technology must replace labor's repetitive work, requiring more skilled workers to run the machines and processes. This trend is already at work in retail, hospitality, and healthcare, where there are many job openings. The demand for even more jobs is likely, as customers want/demand more services. The problem is that many of those that are legally unemployed are not qualified for the openings, due to a combination of attitude and poor training at home and/or in school.

An Unhappy Solution is Possible
There is a chance that many individual and institutional investors, including Pension Plans, lose so much of their investment in private debt that they largely abandon their reliance on fixed income. They then might foolishly devote 80%+ to equities and we could then all sell into that.

On Monday we celebrate all the Veterans and their families who ever wore a uniform to protect their family, country, and way of live. Originally, the day was intended to recognize the Armistice that ended World War I. I hope that it is a reminder that it much easier to spend blood and resources than build a lasting peace.

Until we find the way to accomplish that goal, I say to my fellow US Marines, Happy Birthday. We will protect you and others until we collectively find peace.




Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/11/top-down-dictums-measured-digitally-are.html

https://mikelipper.blogspot.com/2019/10/two-questions-length-of-recession-near.html

https://mikelipper.blogspot.com/2019/10/things-are-seldom-what-they-seem-weekly.html



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