The Trumpian era — could the markets be about to rally?
- New research by Nobel-prize winning economist, Robert Shiller considers the possibility of the bull market continuing and marking what he terms the ‘Trumpian Era’.
- The Yale professor believes consumer spending and corporate earnings will hold.
- Taking a lead from the president himself, the US population is driving consumption.
- Shiller emphasises his model also allows for a move to the downside. The geopolitical risk he flags up is the possible impeachment of the president.
- Contrarian indicators also provide support for the bulls.
Highly regarded economist Robert Shiller has been sharing some bullish thoughts with CNBC. With major equity indices in a long term side-ways trend, he suggests the consumer could once again be the driver of higher stock prices. Earnings for corporations will be supported by Americans buying into the Trumpian pro-business, pros-spending narrative.
“Consumers are hanging in there… “I think that [strong spending] has to do with the inspiration for many people provided by our motivational speaker president who models luxurious living.”
In line with the suggestion that fundamental spending patterns remain strong, the proposal from the bulls is that the inability to break to new highs is down to investors banking some profits rather than dismissing more upside. Analysis by Michael Santoli for CNBC refers to investors having “ consistently harvested cash from the equity market”. (Source: CNBC)
SPX500 — weekly candles — April 2015–Oct 2019:
Rotation to bonds
Liquidity has been leaking out of the equity markets and into fixed-income assets. Corporate and government bonds have both seen their yields fall as part of that rotation. The shift in investor appetite is driven largely by demographics. There is a ‘bulge’ in the population numbers of those coming up to retirement age in Western economies. This necessitates moving out of assets such as equities, which have a higher risk-return than bonds, which in turn, offer a more secure income flow. This is prudent portfolio management rather than a doomsday prophecy.
The move out of equities is also driven by investors looking to take profits and capture market Beta.
Investors looking to buy the dips and sell the highs can readily point to a range of risks. Reports that suggest the market could currently be at a peak. For them, it might be time to take some risk off the table, if only until the next correction. Family offices and high net worth individuals, in particular, are not tied by the same investment regulations as institutional investors such as pension funds. These more fluid investors don’t, for example, need to keep a percentage of assets in stocks, and so can rotate away from risk and leave the hunt for alpha to others.
The rotation into corporates and lower risk assets has taken the froth out of the markets. Since Q4 2017, the S&P 500 has been trading in the 2600–3000 range. What it hasn’t done is drive the markets lower.
Analysis of the reasons why the markets haven’t fallen away has been provided by Ned Davis Research (NDR). The NDR Daily Trading Sentiment Composite has been developed to monitor the mood of the markets and applies that data to consider what the future moves might be.
The index works on contrarian principles. Buy signals are triggered by wide-spread doom and gloom. The ‘excessive pessimism’ zone of the model works on the basis that ‘the darkest hour is before dawn’. The corresponding sell signal comes into play at times of ‘excessive optimism’ with this end of the spectrum working off the ‘shoe-shine boy’ principle. That story is accredited variably to JP Morgan and Joseph Kennedy who reputedly sold out of positions when they were given stock tips from their shoe-shine boy. Their decision was based on the premise that if the youngster was going long, then all others were sure to already be in long positions, and few other entrants would be forthcoming. (Source: Seeking Alpha).
This month the NDR chart has fallen into the ‘extreme pessimism, zone, which is historically associated with the risk-return on equities improving. The case is supported by the fact that it is excessively buoyant markets, characterised by FOMO, which are the ones ready for a correction.
The current earnings season is leaning towards supporting the bullish case. Firms such as Amex and Morgan Stanley have rallied after beating forecasts. Honeywell and IHG disappointed, suggesting that the tech and hotel sectors may be losing some fizz. It’s not the best earnings season but nor is it the worst and this is borne out by the sideways markets. For Shiller and the bulls, there is crucially a suggestion that the US consumer is still willing to do a lot of the heavy lifting needed to support the global economy.
Proceed with caution
There is, of course, a very strong possibility that the bears will prevail. The negative sentiments that are driving a rotation out of risk are driven by very real concerns. The global economy currently faces numerous geopolitical risks. The US-China trade war, the threat of Argentinian sovereign default and the Middle East situation might all be resolved, although progress in these matters is painfully slow. The Brexit process and US presidential elections can’t just be negotiated away and instead will be ever-present concerns for months to come.
Shiller himself points to indicators that could signal a recession. In March of this year, he put a 50/50 likelihood on there being a recession in the next 18 months. His update over the weekend is a development of that earlier work rather than a repudiation of it. Speaking with CNBC, he said:“we haven’t seen such uncertainty in a long time”. (Source: CNBC)
There are reasons for investors to believe equities are about to see a new leg up. Those siding with that view might take comfort from the fact that the sideways shift has now been in place for so long. Despite the outflows away from riskier equities, the stock indices have instead consolidated. Indeed, as Michael Santoli notes: “Rarely do bull markets end by going sideways for 20 months and then falling apart.” (Source: CNBC)