Wall Street Cries Wolf On Stocks – Economy

There is no question that the stock market is richly valued and the economic expansion since the 2008 mortgage debt panic has endured far longer than normal cycles. Recent pessimism has arisen with major banks and analysts warning that the sky may start falling soon. Increased negative forecasts can be a positive contrary opinion signal, so let’s look at some of the concerns the major bulge banks are propagating.

Recently $30 billion in funds flowed out of US equities and the current mid 2017 outflow is at record levels which is being portrayed as a scary signal of impending doom. Oddly past extreme spikes in fund outflows were good times to begin buying stocks. In particular the most impressive rush for the exits occurred in mid 2004 and early 2016. In hindsight these were a couple excellent points to buy stocks hand over fist. Apparently many institutions equate this extreme proxy of equity fund outflow and today’s high priced stock market as a valid correlation, when their own evidence would indicate otherwise.

The fall in car sales in 2017 has caused alarm that consumers are financially depleted which will take the wind out of this economy. A contraction in the auto sector is definitely a near term concern, but how unprecedented is the 2017 decline? Current purchase rates are still healthy at more than 17 Million. Past plateaus in car sales seem to occur every 10 to 15 years and can spend years gyrating in 10 to 20% ranges before a true Auto sector contraction arrives. Annual sales rates contracting from just over 18 Million units to well under 16 Million would be “normal” even if this business cycle expansion were to continue several more years.

What we know is that job creation continues, consumer debt service ratios are very favorable for spending and loan default “rates” are very low. However, a cyclically large number of leased cars are flooding used car inventories along with a normal slowdown in car buying after an eight year easy credit spending spree. It will take more time to work down bulging car inventories, but with global growth picking up speed and healthy consumer balance sheets, it’s likely sales will bottom out this year and enter a trading range pattern in sales for 2018.

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Disclaimer: This report may contain information on investments that are high risk and have substantial risk of principal loss. It is for informational purposes only. Statements in this communication ...

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Moon Kil Woong 2 years ago Contributor's comment

Even though the economy remains in a morass, many publicly traded companies have been able to grow sales and profits by cannibalizing smaller players, buying back stock with artificially low rates, and expanding overseas. Thus the market run up is not entirely built on fumes. That said, I'd focus on rapidly growing new segments of the market and stocks with overseas sales since the expansion has moved to depending on devaluation of the dollar recently.

Kurt Kallaus 2 years ago Author's comment

Very true. 10 Year Yields are testing 9 month lows today. Stock buybacks remain at a high multi-year plateau and operating earnings of major US indices are hitting new records. Some speculative fever in equities, but far from running on fumes.

The formerly strong $ boosted Europe, now a 32 month low in the $ today aids US exports and continues to boost industrial commodities.