On March 9th, 2009, the S&P 500 made an intra-day and 20 year low at 676.53. Millions of Americans drew a straight line from the mid-September 2008 failure of Lehman Brothers through that March low and projected that the S&P 500 would be zero by June. Armed with that projection, average investors liquidated hundreds of billions of dollars in stock investments, never to return. Those investors will never be able to retire. The investors who hung tough at the worst moments or, even better ADDED to their stocks investments during that frightening month, enjoyed returns of 225% over the next 6 years (better than a triple.) The current bull market is the 4th longest in stock market history. Is it reasonable that stocks will pull back 10% or even 20% this year, or can the current rally continue?
So many crises over the last 100 years, and yet the one investing constant is that stock market prices are driven primarily by revenue and earnings growth, interest rates and relative valuation. At present, annualized revenues for the S&P 500 are up only 3.6% year over year through the 4th quarter. Earnings over the same time frame are up 8.2%. Those numbers are fair, but the US stock market is on the high side of fair value. We see interest rates moving up, commodity prices moving up, so not a lot of reason to expect higher stock prices in the near term. US stocks sold off 3% in January, rallied 6% in February, and slumped over 1% in the first week of March. A lot of churn for a YTD gain of only 1.4%.
What's on our mind?
Rebounding energy prices, dollar still rallying.
US gas prices bottomed at $2 gallon in January, already exceed $2.40 gallon as of March. WTI oil was $44 in January, now $50-54. Supply and demand are rebalancing - many expensive fracking wells are running dry, while few drillers will commit to new wells until the price is back over $60 or even $70.
Commodity prices have trended flat to higher in recent months, but the dollar continues to gain. The US economy is simply perceived as a better place to be for investors than Europe or even emerging markets Despite that perception, we predicted at the start of the year that foreign markets would outperform US markets (stock markets look forward to a recovery of growth in Europe and Asia, not backward to the growth already achieved in the US.) Indeed, we see the MSCI World index ex. US up 4.6% YTD versus 1.4% in the S&P 500; Germany up 18%, France up 16%, London up 5.5%, Japan up 7.7%, Shanghai up 18% and India up 6.1%. Only Brazil lags, down 1.8% YTD.
US Labor Situation
Last week's unemployment rate at 5.5% is the lowest level since summer 2008. Why is no one enthusiastic about this condition? Optimus Advisory Group posted an excellent blog, which computed among other values the "under-employment" rate of male workers 25-54. For much of 2010-2012, this under-employment rate plateaued at around 25%, and remains even in 2015 at 23%, higher than previous peaks of 21% in 2002 and 22% in 1992 (previous recessions.) In 2000, when the US economy was running flat out, the under-employment rate was 18% (and the unemployment rate was 3.9 %.)
Wages barely budged in a decade. Adjusted for inflation Real Household Income is LOWER by 4.7% to 15.9% compared to 10 to 15 years earlier. The best educated households have the highest average incomes and the least fall from the top. The least educated households have the lowest average incomes and the worst fall from the peak. A whole generation of Millennials still struggle to pay off college loans, move out of their parents' basements and acquire enough capital to form households and families of their own.
Angry Male Syndrome
The economic situation feeds what we call "angry male syndrome" - the inability to be economically successful, which translates into depression, anxiety, frustration and anger among men, particularly men 18-29. A century go, a 22 year old male had value: That 22 year old body was flooded with "war-mones," testosterone and DHEA. His biology was programmed to kill things and get things pregnant. He could build buildings, navigate ships, farm the plains, drive cattle, cut lumber, marry, buy a house and start a family.
What do 22 year men get to do today? The lucky ones with education work as "interns" fetching coffee for the rest of the office. The ones without education cycle between violence and prison. In their prime years for finding a mate, most 20 something's at are home Saturday night smoking pot and playing Xbox (video games satisfy the aggressive urges that can't be accomplished in real life.)
The most frustrated ones end up committing mass murders (shooting up a school or a movie theater) or committing acts of terrorism (the Tsarnaev brothers who attacked the Boston Marathon, recruits to ISIS.) These "losers" are most dangerous precisely because they have nothing to lose. It's not Islamic fundamentalism that make you a terrorist, it's unemployment, lack of purpose and lack of political relevance.
The jihadist campaign waged by the Islamic State in Iraq and Syria (ISIS) has caused the deaths of ten of thousands over the last two years and forced the displacement of millions. ISIS' methods are gruesome (and amplified by adept social media). However, in comparison to the great Christian and Asian body counts of the 20th Century, ISIS is not even on the leader board.
Mortalities in selected 20th century conflicts
- World War II - 65-85 million
- Chinese Cultural Revolution - 30-40 million
- Russian Purges under Stalin - 20 million
- World War I - 17 million
- Cambodian Genocide - 3.3 million
- Iran/Iraq War - 1 million
- Rwanda Genocide - 800,000-1 million (in three months)
- Syrian Civil War - 300,000
We're not making light of death. We simply point out the war and genocide are unpleasant facts of the human condition. ISIS is less a religious movement, more a herd of cattle infected by "Mad Cow Disease." In the last two years, ISIS succeeded in carving out a modest territory in the bad lands of Syria, Turkey and Iraq. ISIS also succeeded in uniting bitter regional allies including Iraq, Iran, Syria, Jordan, Saudi Arabia AND the United States in common cause to defeat their organization. We expect ISIS to lose most of the territory gained over the next two years, but maintain pockets of resistance through the region for years - a manageable problem.
The 2016 US Presidential Election
Disclaimer: all political forecasts are not what we want, but what we expect. David Edwards, author of this commentary, is a progressive libertarian independent who shifts registration between Democratic and Republican parties depending on which primary he wants to vote in.
In current polling compiled at RealClearPolitics.com, Hillary Rodham Clinton averages 57% in polls for the Democratic nomination, while Joe Biden at 13% and Elizabeth Warren at 12% trail. We believe it is unlikely that Clinton fails to run; if she doesn't, no Democratic challenger has any time left to launch a viable campaign.
The Republican nomination process receives the lion's share of media attention as the candidates proceed, cap in hand from billionaire to billionaire looking for financial support. Over the last half year, several candidates have led the pack for about a month to several months before the press tears them down:
- Chris Christie in January 2014 just as "Bridge-gate" became a national story.
- Mike Huckabee in Spring 2014, until his opposition to gay marriage and abortion overcame his folksy image.
- Rand Paul through Summer 2014, until he proved too centrist for "Tea Party" voters.
- Jeb Bush, in recent months as a candidate who could actually win.
- Mitt Romney for about a week, until driven from the field by general ridicule.
- Scott Walker surged most recently, though he would have trouble winning Blue States with his hatred of unions, doubts about education and evolution.
- So many others who have no chance except to clog up the airwaves.
We believe the Republican primary process will operate like a circular firing squad. The survivor will stagger into the general election July 22nd, 2016 (the convention ends July 21st) bleeding from multiple wounds, easy prey for the rested and well financed Hilary Clinton.
In hypothetical match-ups such as Clinton/Bush, Clinton/Walker, Clinton/Paul, Clinton easily beats all comers. Short of death or traumatic brain injury, we forecast Clinton will win the nomination and the presidency. A far more interesting question - which party will control the Senate and the House in 2016. Who can ride Clinton's coattails into Congress next year?