Right now there is a lot of fear affecting investors - as well as a lot of media noise about the end of the stock bull market that 40% of Americans are dependent on for their retirement security.
The objective truth, at least for now, shows that we are ONLY in the midst of a sharp "correction" in a long term bull market.
Of course if the stock market action of the last week continues, we could certainly see an end to the almost 10 year bull market in stocks that began during the early years of the Obama Administration.
Check Out the Charts Below
Below are two technical charts that paint a very clear picture that for now, at least, this is not the "end of our investments as we know it" and not the time for retired or retiring clients to worry themselves needlessly.
First, when you click on the red link below, you will see a chart of the S&P 500 stock index when it clearly entered a stock bear market back in 2007 (our last severe bear market in stocks).
Remember the Standard and Poor 500 stock index represents 85% of the entire US stock market in terms of total market value.
The chart link below shows the 2 1/2 year period between 2007 and 2009 (the Great Recession bear market) that resulted in a 40% decline in the US stock market.
When you open the chart, notice first that the blue line, which represents the average movement of the past ten weeks of stock market price, crossed below the red line, or the movement of the past 40-week S&P 500 price average.
More specifically, I have annotated the almost exact "bear market confirmation cross down" point (late in 2007) with a vertical red line. The verticle green line, on the right side of the chart (over a year later in 2009), shows the end of the "Great Recession" bear market - in June of 2009 - and the beginning of the current stock bull market.
Open the "Bear Market" chart sample here: http://schrts.co/A2JPgk
Notice on the S&P 500 index bear market chart that between late 2007 and until the Spring of 2009, both the green 10-Week price of the Index was below the red 40-Week price moving average.
When the shorter (blue) 10-Week price moving average is below the longer (red) 40-Week price moving average - AND both are trending downward, that is what a real stock bear market looks like, folks!
Where We Are Today (a lot of market drama and a sharp market "correction")
As you will see in the next stock chart of the benchmark S$P 500 stock index - by clicking the green stock chart link below, it is clear we are nowhere even close to a downward trending stock bear market. In fact, we are in the exact opposite trending stock market as of today, even after last week's ugly selling!
In fact, once you open the current market chart, look at the chart's weekly stock price action (as indicated by the dotted black line). You will see that all four times in the last 2 1/2 years, when the S&P 500 index price retreated down to the 40-week price moving average (red line), the price of the S&P 500 stock index rebounded everytime to take the US stock market to new highs.
Now, after that preface, open the current Market chart here: http://schrts.co/ZiBL8i
Moreover, you will clearly see that both the blue 10-week price moving average is still way above the red 40-week price moving average, and they are for the most part both still headed UP! This is a real life picture showing we are only in a correction in a bullish stock market trend, not the beginning of a stock bear market!
Caveat: There is no quarantee that any of the forecasted market results identified in these charts will materialize.
But past historical data clearly shows, that for now, there is a strong probability we are only witnessing a sharp correction phase in the current US stock bull market.
Summary
If you are, stop worrying!
A bull market in stocks certainly never ends in one week. It takes a lot more time and negativity to negate recent all time highs - as in late September - and retest recent lows, for the stock market to sort out itself out before the majority of smart investors even come close to "throwing in the towel."
Moreover, to reiterate, the Standard and Poor 500 stock index, which represents 85% of the total value of the US stock market, hit a new all time high as recently as late September. It is almost unprecendented that when the largest stock market index in the world hits an all time high just three weeks ago, do we see the end of a stock bull market.
FYI, technical analysis tools such as the charts above - aka "quantitative trend analysis" - incorporates all economic and investment news into the charts you see. It doesn't lie or obfuscate the market data. Technical analysis is the most reliable investment tool(s) available over time. Eventually it holds all investor noise, fear, greed and intelligence accountable, as reflected in the price trends of all aspects of the stock market.
And if you haven't noticed, for the past two years, except for a 5% position in the Mathews Asia ESG fund, we have had NO investments in the US asset classes, sectors, or areas of the global stock market that are now in a confirmed bear market.
That said, because of this expertise I have developed over the last ten years, if we are going to enter a stock bear market, I will know it way before its too late. No, I'm not smart enough to know such valuable and important knowledge intuitively. But I am smart enough to know what tools to use to identify very early a sound and profitable stock market exit strategy.
Finally, remember that even if the stock market does enter into a new bear market, we can make money by investing in what are called "inverse" ETF funds, which creates investment gains if the stock market is in a confirmed downward trending pattern. We are already seeing such "inverse" investment opportunities in the emerging markets and European stock markets, as well as some bonds.
Such money management is what you get with a money manager that is experienced and humble enough to intelligently use technical analysis to implement our no drama investing strategy.
Rocky Boschert
Note: If you are confused by the charts above, please contact me and I will call you and go over the charts via a teleconference.
The US stock markets finished the month of September with a whimper - but booked relatively strong 3rd quarter gains. The main U.S. stock indexes produced strong 3rd quarter returns as all three US stock benchmarks clambered back to record territory over the past three months, so far shaking off tariff tensions to focus on domestic economic health.
Geopolitical tensions drew some investor concern after Italy's antiestablishment government significantly widened its budget-deficit target for next year to fund its populace electoral promises, a move that will likely put it on a collision course with the European Union. The Italy debt issue is the latest that could ultimately impact Wall Street, following a currency crisis in Turkey earlier this summer.
For the month of September, the Dow gained 1.9%, while the S&P 500 posted a monthly gain of 0.4%, while the Nasdaq Composite edged down 0.8%.
Still, over the past three months, the fully stock invested S&P 500 has risen more than 7%, which would be its biggest quarterly advance since the fourth quarter of 2013.
The S&P 500 stock index has risen in 11 of the past 12 quarters. The Nasdaq is up more than 7% over the quarter, and it is set for its ninth straight quarterly gain.
In the latest economic data, consumer spending rose 0.3% in August of 2018, the slowest pace since February, while personal income also rose by 0.3%. The 12-month increase in the Federal Reserve's preferred inflation gauge, fell to 2.2% from 2.3%.
Economic Contradictions
If we look at the facts regarding Donald Trump's economic achievements, Trump and his Republican Congress has so far failed to address most of his Presidential campaign promises (infrastructure spending, a better health care system, the unnecesary border wall, reducing drug prices, - and especially "draining the swamp" (actually Trump's new swamp has been partially drained - by Special Prosecutor Robert Mueller).
Yet Trump‘s tax cuts, mostly benefitting the rich, and the deregulation schemes that his anti-environment Cabinet has set in motion, have in fact driven stock prices higher, as lower corporate taxes and lower regulatory costs have pushed up Wall Street profits.
Hence, as with many clients who are considering retirement and are already retired, these double-edged economic policies have benefitted middle class professionals who are invested in the stock market.
Keep in mind, though, these economic benefits may be short-lived if the Trump Administration continues its anarchistic domestic and global agenda.
One sign already rearing its ugly head is the fact that the US national debt is again soaring to even higher levels. This untenable national debt resurgence is directly due to Trump's Republican tax cuts and his huge budget increases for military spending (apparently military spending is Trump's idea of ”infrastructure").
Now, because of this renewed increase in the US debt, watch for the Republicans to go after substantial cuts in Medicare and Social Security benefits - IF they retain control of Congress - to pay for the debt increases caused by the tax cuts and the budgetary giveaways to the weapons manufacturers.
That said, the current Democratic leadership is also beholden to elite lobby money, so unless their old guard cronies either get replaced or retire, the American middle class may only see superficial promises from them as well (even if they regain control of the House or the Senate).
The Dubious Value of the Chinese Tariffs
In spite of the rise in the value of our retirement and brokerage investments due to tax cuts and deregulation, we are now seeing our investment gains threatened by Trump's trade war with China.
The trade war would be counterproductive for one simple reason: A trade war is not a zero-sum game that will greatly benefit Americans at some questionable point in the future.
It should be understood the current global trade agreements have been in place for decades and are entrenched in US multinational corporate operations - and have overall benefitted Americans much more than not.
More to the point, during the last few decades American consumer lifestyles have benefitted greatly from our "extremely bad" (Trump words) trade agreements of the last twenty years.
The American consumer's ability to shop at Wal-Mart, Costco, Target, Amazon et al are all a direct result of what Trump calls bad trade agreements. For the past three decades, US corporate employment of Asian and other emerging economy labor through globalized free markets trade policy has kept inflation extremely low for consuming Americans - while their labor wage gains have been curtailed by America’s relentless focus on stock market growth at the expense of middle class jobs and commensurate wage growth.
Yet Trump seems now willing to further erode middle class economic power with his nationalist trade wars. In fact, most non-partisan economists and many Wall Street executives believe the trade war with China is an ominous development for middle class America - and corporate profits. Reality alert: the American elites are immune to tariff-imposed price inflation.
US economy is strong, so we don't need a trade war.
Even Trump recently tweeted, “The US economy is soooo good, perhaps the best in our country's history. . .” Of course that isn't accurate. Yet business profits are doing well for the top economic 40% of Americans. Plus, the (massaged) unemployment is low and the stock market is up. So why does Trump want to potentially sabotage it with a trade war?
Many American firms are doing very well in China.
China's 2001 inclusion in the World Trade Organization (WTO) has been a boon to many American companies.
From then until 2017, U.S. exports to China rose by 580%, while our exports to the rest of the world were up by only 100%. This has opened opportunities for many publicly listed American companies. General Motors sold more than 4 million vehicles in China last year, marking the sixth consecutive year in which China was a larger retail market than the U.S. for GM.
China contributes 18% of Apple's revenue in the third quarter of 2018.
Nike shoe sales in China rose 31% year over year during the most recent quarter and accounted for about 16% of its global shoe revenue.
And China contributes roughly 15% of global earnings for firms such as Nvidia, Dolby and Tesla.
Trump‘s economic advisor, Larry Kudlow, sneakily stated that imports from China led to 2.4 million U.S. job losses. The truth is those jobs were lost over a more than 10-year period. Another study instead found that U.S. exports to China directly and indirectly supported 1.8 million new jobs in 2015 alone.
While some American companies are blocked from the Chinese market, many are very profitable there. The American Chamber of Commerce in Shanghai represents 1,500 companies, and their latest member survey found that over three-quarters of U.S. firms in China were profitable last year, the same share as in 2016. Nearly 58% of companies reported higher revenue growth in China than globally.
It is worth noting that the value, in dollar terms, of retail spending in China was equal to 90% of U.S. retail spending last year, up from 27% a decade ago. Within a few years, consumer spending in China will be greater than that in the U.S.
If we start a trade war with China, Beijing will most likely retaliate by shutting American companies out of their market. Our stock markets in many economic sectors may reverse course as a result.
A trade war with China will inflict serious pain on American workers, farmers, and family businesses.
Trade and labor deals with China and other emerging economies has helped American families stretch their increasingly tight budgets. Consumer prices for personal computers, for example, declined 96% between 1997 and 2016. A tariff on any imports is effectively a tax on American consumers who buy those goods.
If Trump blusters his way through with his trade war, the prices of everything from mobile phones (80% of imports came from China last year) and laptops (93%) to Christmas ornaments (94%) and toys (88%) will rise.
American jobs will suffer from Trump’s trade war.
Take Boeing as an example. The multi-state jobs company is America's largest exporter, and China is its largest market. The company expects China's domestic and international air travel to grow at an average annual rate of 7.6% over the next 10 years. Boeing employs more than 50,000 factory workers and 45,000 engineers across all 50 states, and supports an additional 1.3 million supplier-related jobs in the U.S. Some of those jobs would be at risk if China responds to a trade war by instructing its airlines to buy more from Europe's Airbus and less from Boeing.
Apple, which says it is the largest U.S. corporate taxpayer, is another example. Most of its products undergo final assembly in China, the company said in a recent letter to the Trump administration “Every Apple product contains parts or materials from the U.S. and reflects the labor of 2 million U.S. workers across all 50 states.”
American farmers and small manufacturers will be hurt economically
China is our largest overseas market for agricultural goods. About one-third of the U.S. soybean crop is sold to China, which would force China to cut its US purchases and buy more from Brazil and Argentina.
The global supply chain is also critical to small firms that manufacture goods in the U.S., and China is a key supplier. A prolonged trade war would simply accelerate the dispersal of that supply chain from China to other Asian countries and would not result in production and assembly of those goods moving to the U.S.
New taxes on those components will instead lead to a mix of lower profits and higher final goods prices in the U.S., as well as layoffs.
China is less and less trade-dependent, so a trade war is not effective leverage over China's increasingly domestic-driven economy, so attempting to attack its exports will not inflict much pain.
Specifically, global exports today account for just 2% of China's GDP, down from a peak of 9% in 2007. In contrast, domestic consumption in China now accounts for more than two-thirds of China's economic growth and more than half of its GDP.
Last year, Chinese exports to the U.S. accounted for only 19% of total Chinese exports, limiting significantly the impact of new tariffs applied only by the U.S.
Hence, much of the impact of new U.S. import taxes (tariffs) will not be borne by Chinese companies; about two-thirds of the 25 largest exporting companies based in China are foreign-owned. Moreover, China’s Xi government will undoubtedly step in to provide financial aid to companies that are hurt by the Trump tariffs.
With fiscal revenue up more than 10% year over year during the first eight months of 2017—the fastest growth rate in seven years— Beijing has the resources, as well as the political will, to subsidize its exporters, just as it did a decade ago during the Global Financial Crisis.
The Chinese economy is relatively healthy
In August of 2017, Trump’s economic advisor Larry Kudlow stated the lie that the Chinese economy “looks terrible” and “business investment is just collapsing,” suggesting that this puts pressure on Xi to give in to U.S. demands. This comment is nothing more than Trump administration false information to justify his trade war.
Yes, Chinese stock market is weaker than it was a year ago, with the price of the Shanghai Composite Stock Index down 19% year to date, but earnings growth for larger industrial firms (including many not listed on a stock exchange) remains very healthy.
Chinese Industrial profits rose 17% year over year during the first few months of 2018, an impressive pace given that earnings rose 21% during the same period just last year. Profit margins are at their highest levels in eight years. Manufacturing investment, far from collapsing, is up 7.5% this year, compared to 4.5% during 2017.
Of course China is growing more slowly, on a year-over-year basis, as the economy matures and because the economic base has become very large. And policymakers in Beijing do face significant challenges, such as high debt levels and a weak social safety net.
But the macro economic numbers in China remain quite strong. Inflation-adjusted (real) retail sales rose 7.4% during the first eight months of this year in China, compared to a 2.9% growth rate in the U.S. (Online sales of goods in China rose 28%.) Real household income rose 6.6% in China for the first half of 2018, vs. 2.1% in the U.S.
Over the last 10 years, real per capita income rose 123% in China, compared to 9% growth in the U.S. We should not start a trade war based on the mistaken belief that we face an economically weak opponent.
In 2017, China accounted for 31% of global economic growth, compared to a 9% share for the U.S.
Overall these numbers indicate that a healthy Chinese economy is also a good thing for the United States and the global economy.
Rocky Boschert
(Economic data borrowed from Matthews Asia Investments, an independent mutual fund company)
