Streetwise for Friday, September 14, 2018

Fortune Magazine’s August cover was a stark black and white with large letters reading, “The End Is Near.” On September 10, a headline attributed to Goldman Sachs read, “Stock Market Bear Signal at 4-Decade High.”

Goldman wrote that according to its bull-bear indicator, the likelihood of a bear market is at its highest point since around the mid-1970s. The firm then countered its own point by saying, “We’re not flying the flag here and saying that there is going to be a deep bear market.”

So, what exactly are you saying? Could it be that no one really knows what the financial markets are going to do and when?

The conclusion to the 54-page report (of which I was unable to obtain a full copy), was not to panic and head for the hills; but rather that a period of lower returns should be anticipated. Goldman needed 54-pages to reach that conclusion?

Bank of America Merrill Lynch (BAML) is keeping a close eye on 19 bear market signals, such as rising rates, high valuations, increased volatility and outperformance of low-quality stocks.

Fourteen of those 19 signals have now been triggered, BAML says, suggesting we are in the later stages of a nine-year-old bull market. Their conclusion: a bear market is coming, but for now keep buying stocks.

Is it any wonder that the average investor does not know which way to turn?

Financial columnist Jeff Sommers put it succinctly when he wrote, “What if the good times that are evident in important sectors of the markets and the economy just keep rolling, at least for a while?”

Such a bullish possibility has, in my opinion, been understated given the strength of the current economic numbers. And there is a strong contrarian case that the power of the current economy and markets is also under estimated.

For example, consumer confidence is at levels not seen since October 2000, according to the Conference Board. And the economy’s annual growth rate of 4.2 percent in the second quarter was the highest in nearly four years. Moreover, the unemployment rate, 3.9 percent, hangs at its lowest level in decades.

That statistical snapshot depicts a prospering economy. Barring an unexpected event, the simplest prediction is that we will see more of the same. Why, then, all the concern that bad times will soon be upon us? Two key reasons can help answer that question.

The first is the risk that the markets and economy will be derailed by a truly major political, constitutional, military or trade crisis during the Trump administration. Although trying to quantify that risk is impossible, it cannot be dismissed. Moreover, any one of those crises would result in a market downturn.

To follow thru, what would the actual damage be to dividend raising corporate giants over a period of a year or two. If history, going back to 2007, is any predictor, the damage would be relatively minor and short-lived.

There is another risk that appears in the media almost as often as Donald Trump. As I wrote several weeks ago, the narrowing gap between short- and long-term Treasury yields seems to be unnerving to Wall Street. One reason is a somewhat mythical theory that says a lessening of the spread between long and short-term interest rates, i.e., a flatter yield curve, foreshadows an economic slowdown.

However, if you go back to the 1990s, the data shows unequivocally that the economy can flourish for long periods of time, despite a relatively flat yield curve.

Selling or avoiding equities during the late 1990s, thinking that the yield curve was predicting weak growth, was a losing proposition. Both the economy and the stock market surged, with the S&P 500 index up 139 percent.

Note to Readers: I will again be teaching Introductory Investment Analysis for the Ringling College’s Lifelong Learning Academy, now called the Osher Lifelong Learning Institute. Classes begin on Monday, September 24 and run every Monday for 8 weeks. Call 941-309-5111 or go to https://olliringlingcollege.org to register.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddInternational.com.