As the year 2019, and the end of the second decade of the millennium comes to a close, financial markets are at an all-time high, and at this writing, still rising. President Trump believes it’s due to his genius. But he had little to do with the bull market that began with the end of the George W. Bush Great Recession and continued through two Obama terms.
A recent Bloomberg Businessweek piece labels this as “The Bull Market Almost No One Saw Coming.” To quote from that piece, “So at the start of the country’s troubled teens, who would’ve predicted U.S. stocks would not only lock themselves into the biggest bull market ever, they’d also do better than they ever did before? But that’s exactly what happened.”
The Bloomberg article goes on to remind that gains in the S&P 500 index since Dec. 31, 2009 are poised to be the highest of any decade since the 1950s. Stocks in the S&P have returned 249% in the past 10 years, substantially above the historical average. This has been the first decade without a bear market, defined as a 20% drop from a peak.
As is inevitable over a 10-year period, there have been some glitches, with six corrections of 10%, but not enough to “kill the bull.”
Some who lost money during the Great Recession were skeptical of markets and stayed out, thereby losing gains they could have reaped during the Obama years and, yes, during Trump’s three years. Those who continued to invest through their retirement funds saw those funds grow nicely.
But what about now? As Yogi Berra sagely reminded us, “It’s tough to predict stuff — especially when it’s in the future.”
Fund managers entrusted to manage money are expected to say something, however muddled the message. The answers you get depend not only on who you ask, but on how you ask the question.
Economists tend to stay away from predicting financial markets and rendering personal financial advice—that’s for your financial advisor. But let’s take a look at some things going on.
During the lengthy, albeit relatively slow, recovery from the Bush Recession of 2008-09, the Fed kept interest rates low with an expansionary monetary policy. Since December 2015 the Fed began gradually raising interest rates. Those low interest rates during the better part of the decade are believed to be significantly responsible for rising stock markets. The few alternative investments with reasonable return made stocks, especially dividend-paying stocks, attractive. Rising corporate profits and economic growth fed into rising stock prices.
Even as money managers dislike having the Fed raise interest rates, the Fed increases were in line with an expanding economy, and gradual enough not to panic Wall Street. Stocks kept rising. Recent confidence in financial markets was no doubt buttressed by the Fed’s dovish reaction to the precipitous market drop in December 2018. The Fed responded with the questionable action of reducing rates three times in 2019, during full employment and economic growth. This was termed as a “preventive action” to prevent a recession resulting from concerns over the tariff and trade war and other worries.
Some economists, including this scribe, and some Fed bankers for that matter, believe the Fed was overly accommodating. The Fed should base its decisions on the goal of non-inflationary full employment. With that, financial markets will achieve their own, proper, market levels.
The accommodative stance of the Fed is further reinforced by its recent announcement that it will base future inflation readings not just on the recent period, but on the average inflation rate over a longer period of time. In other words, even if there is a spike in inflation, it will be averaged out with lower previous rates, suggesting that the Fed will be slower to take the preventive action of raising interest rates.
An accommodative Fed, along with stable fundamentals, such as GDP rising at credible rates varying between 1.6 and 2.9%, no doubt contributed to steadily rising financial markets.
While the stock market is not the real economy, there is a definite link in that, in the event of recession, or even significant economic slowdown, stocks would take a hit—and given the market’s lofty heights, possibly a deep and lengthy hit.
As of this writing, there is some euphoria with the announcement that “phase one” of the trade war imbroglio is completed. However, it is still problematic, as even the usually understated NPR reports that results are “clear as mud.” Each side is telling its constituents what they want to hear. While both China and the US are concerned with harm to their economies from continuing trade uncertainty, it is President Trump who has to worry about reelection while President Xi does not. It’s obvious who has the weaker hand in this standoff.
Some analysts make a plausible point that the cautious stance of many investors is a positive sign for markets. It would be far more worrisome if there were boundless euphoria and universal confidence that markets will continue to rise from current record highs.
Regarding bond prices: low interest rates mean high bond prices. Bond yields and bond prices vary inversely — it’s a mathematical relationship — rising interest rates will reduce the equity of bond holders.
Wall Street opinions range from sheer optimism to belief that markets are overbought. Some, such as the Franklyn Templeton outfit, are “modestly cautious.” It’s hard to dispute that.
I don’t pay much attention to Jim Cramer, the entertainer/market guru and his usual loosey-goosey “Mad Money” observations. But he might have something with his observation for 2020 that investors “should trim holdings because the market is a little too optimistic.” And Cramer “doesn’t believe the China/US Trade deal holds water.”
However, my favorite quote is from John Kenneth Galbraith’s “The Great Crash,” about the Great Depression.
“So the wise on Wall Street are nearly always silent. The foolish thus have the field to themselves.”
— John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears Saturdays in the Monroe Times.
