Why Markets Should Continue to Rise This Year

A government shutdown was averted last Friday when President Trump signed a $1.3 trillion, 2,232-page omnibus bill. The deadline was midnight Friday and the bill came out late Wednesday.

No one really had the time to go through it, and that’s on purpose.

The fact that no one really knew what was in it — besides the drafting committees and the lobbyists who crammed it full of pork — speaks volumes about how the people’s business is conducted in our democracy.

Theoretically, we still live in a republic, but the question is: Who exactly represents whom in Washington?

But let’s consider the driving force behind today’s rigged economy and rigged markets — the Federal Reserve.

One of the main reasons central banks have cited their historically cheap money policy is that making money cheap means that banks will lend it out to the main economy. The belief was that it would eventually stimulate Main Street.

But it just hasn’t happened. The gains have all gone to Wall Street.

Reports on the U.S Gross Domestic Product (GDP) for the fourth quarter of 2017 was nothing to write home about. At 2.6% annual growth, it was 0.3% lower than expectations. That type of a result is minimal at best.

Sadly, those in the financial media considered it positive because it showed 2.80% growth in real personal consumption. But let’s dig deeper…

Consumers represent about 70% of GDP. If you look beneath the surface, what you’d see is that consumers aren’t actually doing well across three core areas that allow consumers to spend.

First, there’s income and wages. On that score, fourth quarter real disposable income only grew about 1.80% above the previous year rate. Some 80% of workers are seeing flat to declining wage growth.

Packed within those details there’s also reporting on personal savings. In recent months the U.S savings rate fell to near its lowest recorded levels in the past 70 years. The only time it hovered so low was just before the recent financial crisis.

Second, there’s credit card debt. Over the last four quarters, it has increased by about 6% annually. That’s three times faster than its rate during the years following the financial crisis, and double the increase of income. What this means for those on Main Street is that they are keeping up with expenses by sinking into greater debt.

The Atlanta Federal Reserve has dialed back its first-quarter growth forecasts from 5.4% to a lackluster 1.8%.

Goldman Sachs, my old employer, lowered its own growth forecast to below 2%.

The promise from central bankers is that by injecting of money into the economy, they would help real people. But the data proves anything but.

But they need to continue propping up markets. They are all too aware that media hyped, government constructed “growth” isn’t real.

Despite the latest turbulence in the market is still the longest rally in history. Over the course of the nine years since the crisis, the S&P 500 index nearly tripled in value after hitting a low of 676.53 on March 9, 2009.

That’s a streak without any decline of 20% or more, making this bull market the second longest ever.

Many in the mainstream media attribute this good market fortune to “global economic growth and stronger company earnings.”

They know better, and you should too.

The truth is, it’s all about the $21 trillion fabricated by, and dispersed from, the world’s major central banks.

That money is conjured out of thin air.

But things have gotten more interesting lately. The market is jittery about Trump’s trade policies, which has sent markets tumbling in recent weeks.

The volatility is also related to market fears that central bank supplies will go away too quickly, whether due to inflation or growth.

These factors will keep sparking intermittent fear and volatility this year — but central bank collusion will not be going anywhere. Heads of those banks will do whatever they need to do to support markets and economies.

Yes, the Fed has been conducting its pinprick interest rate increases. And the Bank of England has been raising rates, for example. But the European Central Bank (ECB) has not followed suit. They’re the big holdout.

That matters to markets and your money because it will keep global rates at relatively the same levels. That would temper the markets from reacting to hike rumors too harshly, as we saw at the beginning on February in the U.S.

Even central banks making policy changes have been reluctant to raise too rapidly. They want to keep the monetary hoses going to try to increase persistently low inflation and growth.

That means these policies will remain relatively in play on a global scale. Central banks want to ensure that their respective financial markets are propped up with fabricated money as long as possible. While the ECB may be holding out, it is no exception.

Understanding this policy environment, economists had been raising their growth forecasts. In a late-January survey, their consensus was that the global economy would expand 3.7% in 2018 and 3.6% in 2019. That increase was better than their initial forecast survey.

I view this as just another attempt to make it seem as though central bank policies are working. Based on reality, though, you should not expect the economy to grow as much as being forecast. That gap will leave room for central banks to put the brakes on raising rates.

Expect major central banks to end the year, on average, with asset books in total size right where they started.

While there will be some minor rate hikes here and there by the Fed, and mild tweaking of massive asset books, the overall story will remain the same.

But there’s another reason to believe the bull market could run longer than most people expect.

With the recent passing of the GOP tax bill, the money that S&P 500 and other companies will save will ultimately end up in the hands of Wall Street. This will play out by big banks buying back their own shares and bolstering CEO bonuses.

As analysis from JPMorgan Chase recently noted, “S&P 500 companies will buy back a record $800 billion of their own shares in 2018.” These will be “funded by savings on tax, strong earnings and the repatriation of cash held overseas.”

That figure blows away the $530 billion in share buybacks over 2017. So far, companies have already announced over $151 billion of buybacks since the beginning of the year.

All of this is another reason that the stock market, even with increasing volatility, should continue to rally this year.

Firms facing tax breaks are now plugged into another form of policy motives while buying their own stocks. Even JPMorgan Chase CEO Jamie Dimon called the tax cuts another form of quantitative easing.

Yes, it is true that the stock market suffered some steep drops this year, including a major drop in early February. That’s when the Dow shed 1,175 points in one session, a record one-day point drop.

In order to combat that, $113.4 billion of buybacks were announced in February, smashing a three-year high. You should look for more of these buybacks and continued central bank, easy money policies to lift the markets in the months ahead.

The bottom line is, you can expect this rally to continue with governments and central banks touting strong global economic growth yet maintaining their policies — just in case.

Whether real growth hits Main Street or not, higher corporate earnings and U.S. tax breaks will also provide companies with more money to buy their own stocks. This vicious cycle will continue — until it can’t.

Regards,
Nomi Prins
for The Daily Reckoning