The Breakthrough to Send Stocks Right Over the Top
All aboard the Wall Street runaway express. So goes a headline in The Australian today.
The Dow held above 26,000 points overnight, after crossing it for the first time on Wednesday.
Cash balances among portfolio managers in the US are now down to a five-year low.
The data for individual investors says they’re even more aggressive.
Does this signal a top?
The good times can keep a-comin’
Not necessarily. In March 1998, for example, investors only held 11% of their portfolios in cash.
That was even lower than the 13% we’re seeing right now.
It would have been easy to conclude that in 1998, there was a danger sign that investors had gone ‘all in’.
Except the NASDAQ went up another 177% until March 2000!
I’m not suggesting US stocks will repeat that big leap exactly. But they can certainly keep rising from here.
There’s actually an interesting statistic I saw this morning.
A group called Longview Economics suggests that, on average, 40% of the gains in a bull market come in the first 12 months. An additional 32% come in the final 12.
The idea here is that we’re going to get a ‘melt up’ before stocks go into their next (significant) downturn.
After all, it’s not as if there’s ‘irrational exuberance’ in the stock market.
That’s the famous phrase former Fed chairman Alan Greenspan used in 1996.
However, the NASDAQ Composite has only just crossed its inflation-adjusted high.
Apple only trades on a forward price to earnings (P/E) ratio of 14.
Facebook is higher…at 26. Alphabet (Google) is at 27.
These are some of the most widely held stocks on the market.
The ‘value’ investing types might call these stocks ‘expensive’…but even a hardcore Warren Buffett devotee isn’t going to say these types of figures are crazy.
The ‘miserable’ bull run of the last nine years
In fact, one line I saw kind of sums this all up: This has been the most ‘miserable’ bull run in the history of stocks.
We’re not talking about the actual percentage gains here. We’re talking about the commentary and mindset around the market.
Since 2012, there has been an endless stream of fear about why another 2008 could happen…the high world debts…the central bank interference…the worry over China…and a myriad of other concerns.
These fears have kept a lot of people…and money…on the sidelines the entire time.
That’s despite the fact that US stocks have mostly trended up the entire time.
2017 saw the lowest volatility on record.
Markets can only ‘top out’ when everybody is all in.
That means there’s scope for investors to bid up stocks higher as investors get more aggressive.
Think of the alternatives. Inflation erodes the buying power of cash.
And it’s not as if bond yields offer much in the way of income. Bonds are much more widely available to US retail investors than for us here in Australia.
But the 10-year Treasury note still only yields 2.6%.
Even a million dollars would only get an American a yearly income of $26,000.
That comes with a healthy dose of capital risk, too, with growth picking up around the world.
It’s a brave US investor who looks to load up on bonds right now.
Most Americans don’t have anywhere near that level of savings, anyway.
US investors will look to the stock market to get ahead
The narrative is falling into place for people to feel comfortable getting into stocks.
Trump’s tax cuts have been all over the media…the repatriation of US corporate cash held overseas will go into dividends and buybacks…and now we have China reporting good growth numbers.
I made the case in the December issue of Small Cap Alpha that we could see the ‘Big Three’ economies of China, Europe and the US firing together this year for the first time since before 2008.
This is what we need to happen for stocks to keep trending higher worldwide.
For a real ‘liftoff’ to happen, however, we need something to spark investors into genuine, over-the-top excitement.
Something as sweeping and disruptive as the internet was in the mid to late 1990s.
It’s the kind of technology that can remould industries in major ways, but is very difficult to ‘price’ in what way accurately.
That will allow stocks to lift off future projections.
This time around, it won’t be the internet, which sparked the last massive rise on the NASDAQ index…or the China growth story, which sent commodities booming before 2008.
For my money, it will be the hype and genuine breakthrough that is the blockchain.
This is the technology that underpins cryptocurrencies. But its application can and will go beyond this.
Wall Street and the finance industry will push it. Nothing is better for business than a story like this to get retail investors into stocks.
They need something. Goldman Sachs just came out and said its debt traders are making something like a 10th of the money they were a few years ago.
Retail investors are also just parking their money in index funds and not using Goldman’s services.
However, Blockchain related stocks — no matter how tenuous the connection — have seen big gains, as investors remain on hyperalert around this development.
Everyone is on the hunt to find the companies that can cash in on this.
Blockchain offers a genuine technological breakthrough…and a perfect trigger to send stocks right over the top.
More next week.
Editor, The Daily Reckoning Australia