The Most Hated Economic Recovery Ever!

Thu, Aug 30, 2018 - 10:17am

So a concerned Raymond James financial advisor (FA) emailed us yesterday with the question:

"Jeff, I know you have connections in Washington and wanted your take on how the mid-term elections are shaping up and how they will affect the market, if at all. I have a couple of clients that are concerned that the market will be hurt if the Republicans lose their majority in the House."

Our answer read, "All the experts I know tell me the House will fall, but those same folks told me Trump would never be President!" Alas, under this president, the polls seem to be worthless. Time will certainly tell, but Andrew and I do not think much will change even if the House falls to the Democrats. Remember the famous President Obama quote, "I have a pen and a phone." The same can be said about DJT! Meanwhile, as expected since the February 9 undercut low, the stock market continues to trade to new all-time highs. So yesterday, on Fox Business, our friend Neil Cavuto played a video excerpt from David Stockman about all the issues facing our Republic. We were asked, "What do you think?" Our response was (as paraphrased), "Well, David Stockman is much smarter than we are, but he has been 'smartly wrong' for a very long time." Indeed, the last time we spoke personally with him was at Minyanville's Christmas Festivus party in 2009. He was bearish then, and he is bearish now, believing the economy is going to go into a tailspin. Shortly thereafter, a portfolio manager sent us this quip from Bloomberg:

Read All-Time High

"For years you used to hear people call the rally in stocks 'the most hated bull market of all time.' It caused ire for various reasons: some people were under-invested, others just thought that we hadn't solved the underlying issues that caused the crisis, and maybe a few were just upset because they didn't like President Obama or the Fed. You don't hear that phrase too much anymore, but I wonder if soon we'll be able to talk about 'the most hated economic expansion of all time.' Once again, you have a lot of people who, for whatever reason, are predisposed to thinking that a downturn is coming. Some think the tariffs will cause a recession. Others worry that U.S. capacity is near maxed out and that the timing of the tax cuts was irresponsible. Some just don't like President Trump. Others may just be thinking that the economic expansion is getting long in the tooth. But in the meantime, there's a lot of good news out there. Corporate profits on a pre-tax basis are growing at their fastest pace in seven years. Consumer confidence is absolutely soaring by multiple measures. And arguably, U.S. households are just getting warmed up. Remember, household savings were recently revised up and are substantially higher than the pre-crisis period, meaning those same exuberant consumers may have untapped spending power. Toss in a loosening of consumer credit standards into the mix, and it's not hard to imagine this expansion having more legs."

Our comment, "Well said!" And to all disbelievers, we are reminded of the famous Groucho Marx lament, "Who are you going to believe, me or your own eyes?!" Verily, just look at the chart above, and then consider what happened in previous instances when the S&P 500 (SPX/2914.04) broke out above previous upside consolidation patterns. Bear in mind when the SPX broke out of the 14-month upside consolidation in 2016, it tacked on ~35%. That was reminiscent of the upside consolidation between 1994 and 1995 when, after said upside breakout, the SPX gained some 40%! You can see these events in the excellent report released yesterday by our colleague Andrew Adams. To be sure, "Who are you going to believe, me or your own eyes?!

Read also Felix Zulauf: Continued Rally in the Dollar Will Be Bearish Nearly All Asset Classes

Ladies and gentlemen, this is a secular bull market, and the cuties that called for a crash, and/or a range bound stock market, are missing the fact that secular bull markets last for 14+ years (1949-1966 or 1982-2000). Have we raised some cash from time to time when we thought a pullback was coming? You bet! Have we rebalanced and re-allocated capital from time to time? You bet! However, it has ALWAYS been within the construct of a secular bull market. In past missives, we have discussed where it began: in October 2008 when most stocks bottomed, March 2009 when the averages hit their nominal lows, or in April 2013 when the averages finally exceeded their previous all-time highs. You pick it! But, wherever you're starting point, there should be years left in this bull market.

We think the recent upside break-out above 2900 is sustainable, and we anticipated it! Whether it spikes higher here is doubtful, but a grinding higher scenario is likely in the cards. The short-term energy mix has been used up, suggesting the 2930-2935 level may stall the equity markets. So the S&P 500 looks poised to stand near its all-time highs with a more negative energy mix arriving next week, but nothing should carry the SPX back towards 2850. In Tuesday's Morning Tack, we suggested the SPX should "stall" for a while, and this morning, that's exactly what's happening as worries about China have surfaced again.

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