“There are three kinds of lies: lies, damned lies, and statistics.”
Mark Twain “Chapters from My Autobiography” (1907)
The US stock market as measured by the S&P 500 is up year to date since the first of the year by 21.2%. Good news. The stock market is up year over year by 4.00%. Not such good news. The stock market in the past six months is up by 4.00%. Boring news. Lest we forget, the stock market declined by 17 ½% in the three months prior to Christmas Eve 2018 so most of the 2019 return reflects a recovery from the prior late 2018 market decline.
Heading into October bears had a surfeit of reasons to be, well, bearish. Prospects for the settlement of the trade dispute between the US and China had dimmed. Corporate earnings were expected to reflect the slowing of US and global economic growth rates, the ISM Manufacturing report had dropped to its lowest level since the recovery from the Global Financial Crisis and then there was the matter of the inverted yield curve with its reportedly uncanny ability to predict the onset of economic recessions.
Interestingly, despite the (or perhaps more accurately because of) this bearish backdrop, the S&P made a new high on the 28th and was positive 3.4% for the month. Perhaps more interestingly still the Consumer Confidence Survey revealed that slightly more US consumers, 32.2%, expected the stock market to be lower in twelve months than expected it to be higher, 31.7%, a phenomenon that has occurred only six times in the past thirty years.
Something else may be occurring in the financial markets that may be offering bulls a firm foundation upon which to rest their case. Investors in the US have allowed the return of US equities, in particular the large-cap tech names, to obscure the reality that post Global Financial Crisis global equity market investors have found opportunities for significant profits to be less than an equal opportunity experience with ten-year annual rates of return in foreign developed markets averaging 5.4% and that of emerging markets 3.1%. Since August 23rd the S&P has risen 6.5% but foreign developed markets are up 8.8% and emerging markets 9%. This isn’t sufficient information to confirm that a reversal of fortune awaits domestic and foreign equity markets but it’s worth keeping an eye on.
Equity market bears base their pessimism on the economy. The US economy hasn’t been in recession for ten years so we must be due for one. The Federal Reserve will continue to lower interest rates and interest rates in the bond market will remain low and possibly even go negative. Inflation is likely to be a no show for years to come but its opposite, deflation, is something we need to take care to avoid. This is consensus opinion but a better wager to make may be a contrary one.
Recessions occur to correct excesses in the marketplace be they financial or economic. Where do these excesses currently exist? What if central banks, both US and foreign, after ceaselessly shoveling additional forms of stimulus to light the fires of economic activity, succeed beyond levels of their current reckoning and the global economy is about to enter into a multi-year period of accelerating economic growth rates? Debt servicing costs for US consumers are at their lowest levels in forty-five years. US unemployment levels in the US are plumbing historic lows and wage rates, especially for those compensated at lower levels, are increasing at an accelerating rate as are a variety of measures of consumer spending that represent 70% of the US economy.
All things being equal I’d rather be an optimist than a pessimist but better still I’d like to wager on increasingly good news as a guidepost towards increasing investment returns in the financial markets. How about you?
Mark H. Tekamp
November 6, 2019