“Ecclesiastes 5:10 tells us Whoever loves money never has enough;
whoever loves wealth is never satisfied with their income.
This too is meaningless.”
Way before the Longest Bull Market in History started in the late 1980s there stood a confident Humpty Dumpty Bull Market that started with the ascension of the Reagan Revolution. This Bull Market in the early 1980s began with the confidence that President Reagan initiated through overturning cumbersome business regulations, crushing staggering inflation and reducing the tax burden on all Americans. Retirees were even able to pad their portfolio with : AAA tax free and tax deferred savings & investments vehicles producing double-digit returns with liquidity. Many survivors of the sideways 1960s-1970s market that went nowhere recalled the big Don Ho hit of the times which helped them forget the civic and social unrest of the decade that saw the stock market stagnate from Dow 1000 in 1966 to the same level in 1982 16 years later.
Make me warm all over
With a feeling that I’m going to
Love you till the end of time”
Savers and Investors were happy again as the Reagan first term produced an average 15% stock return from 1981-1983, according to Reuters, despite a first year for the administration that produced a negative return. Happy Days were certainly there again in a big way and may be here for a season again if policy moves ensue that are market movers. Then as in now, markets get ahead of themselves and the Reagan trade came unraveled in 1984 as interest rates rose and the market dropped nearly 4% The news media including Business Week had pronounced “Stocks Dead” on their cover in 1979 were circling the wagons again in 1984 and telling folks to run for the hills. Another 1960’s song by the Youngbloods “Get Together” was more to the moral point regardless of where in this stock market and economic cycle we are. It paraphrased the message of Ecclesiastes the “all is vain” including the pursuit of money and encouraged us to “smile on our brother and everybody get together, right now”. Right now we see a faint glimmer of many loving this market a little too much and reminders in the past of what false hope leads to in the dust bin of broken stock portfolios and busted dreams.
Investors who stayed the course were richly rewarded, albeit with the one infamous October 19, 1987 day when the market was down 22.8%. Investors were richly rewarded as the Reagan Trade had legs and carried investors to the biggest gains of the modern-day market. The current Trump trade since the historic election is making many investors feel “warm all over” but in the 9th year of the second longest Bull Market in history, investors should look out for “Tiny Bubbles” even if the big picture looks rosy. Bear market Waldos can be found in the most inconspicuous places. Here’s a few to certainly pay attention to as Trump’s policy initiatives are rolled out and implemented:
- Fright-Tiny Bubbles pop when concerns for potential recession are imminent. This period of stagnant recovery has been the worst since World War II. “A recession is around the corner” has been echoed so many times that investors are complacent as reflected by the fact that the VIX index, which measures future volatility went well over 100 days without a 1% drop according to the CBOE. That is slowly changing as investors ponder global warnings from ISIS, Iran, North Korea and the Chinese that grow by the day. The short term stock market effect of a military confrontation is substantial.
- Rising Interest rates-the classic indicator of the market faltering after three interest rate increases by the Fed is dead because of the fact that we are not in a normal interest rate cycle. It could rear its ugly head, however, if the Fed were to raise rates at 3 consecutive meetings and hit its target which of three 2017 rate increases because of significantly faster economic growth. – Unlike the 80’s we are facing a demographic debacle in much of the world as longevity increases and transfer payments to 78 million baby boomers force a demographic headwind. A good read here is Harvard Professor, Laurence Kotlikoff’s 1996 classic “The Coming Generational Storm” If the debt and interest service exceeds 100% of GDP as it will soon without significant real economic growth, the market will falter.
- A legislative surprise as Bernanke, Yellen and the Fed’s zero interest rate policy was sweet tonic for the last 8 years, it will take promised tax cuts for individuals and corporations to increase profits and take home income to fulfill where the market is trading at today. The market currently sees simplification, reform and a trillion cut as imminent for passage later in the year. Investors should remember that it took nearly 3 ½ years for the Reagan tax cuts to take effect which helped propel the bull market of the 1990s.
Then there’s what I call the Dorothy Dilemma which measures the degree of disappointment that the Wizard of Oz star had to face upon realizing that the Emerald City was contrived by a dream and a great wizard with some cool machine. Dorothy, facing the comfortable confines of Kansas chose to go home. When investors choose to go home and lock in great gains for a mundane money market is anyone’s guess but don’t let Tiny Bubbles take you into the Spring without realizing that there’s probably some more mojo left in the Stock market Trump Bump until we must go back to Kansas. Retirement Income investors that are about to take a retirement lump sum or rollover should be overly cautious. Better keep the perspective below on your nightstand:
Money can buy a House…………But not a Home
Money can buy a Bed…………..But not Sleep
Money can buy a Clock…………But not Time
Money can buy you a Book………But not Knowledge
Money can buy you Medicine…….But not Health
Money can buy you Sex…………But not Love –
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