As Yogi Berra supposedly said, “It’s tough to make predictions, especially about the future.” So as a surprise to many, the S&P 500 Index came within a hair’s breadth of setting a new record during the first week of June but didn’t quite get there. Not that it really matters. The last high water mark for the S&P was on May 21st of 2015 when it hit 2,134, and in the past few weeks it clawed its way to about 2,115 before falling off a bit. Earlier this year, it had plummeted down to the 1800’s. Who knows?
Stock prices only partially reflect what companies earn in profits right now. To a larger extent they are determined by the behavior of crowds --- crowds that hazard a collective guess as to what future profits will be in the years to come. Today’s price of a stock reflects the perception of increases or decreases in a company’s future profitability. For the purest expression of this expectation phenomenon, look no further than Bay Area companies that lose money today but that enjoy valuations in the billions. Investing, like golf, can be a game of endless hope.
To tie future financial security to a system that appears to have such shaky underpinnings requires a leap of faith and a bet that 100 years of history will repeat themselves --- sooner or later. A study of business cycles is reassuring. The Institute of Trend Research (ITR Economics) offers their assessment that we are on the upward curve of the business cycles that apply to most industries. Consequently, the economy should continue to improve through 2016, will be best in 2017, will begin to slow in 2018 and will experience a mild recession in 2019. Today’s economic growth is low, which is common coming out of a recession, and anything over current 2.6 percent per year is “just gravy” according to ITR’s CEO, Brian Beaulieu.
One interesting factor holding up our country’s growth rate is the WWII “baby boomers” --- the demographic bubble of business owners and managers in their 60’s and early 70’s who have “made it” so to speak and are just “coasting to the finish.” This larger than normal subset of the American business community sees no reason to take on risk, debt and a struggle to grow. They’ll leave that to the millennials (born between 1980 and 2000) who work 24/7 and sleep in the wastebaskets of their cubicles. The effort of these folks are fueling much of what growth we have.
But ITR’s further application of business cycles indicates that we will go on to enjoy a solid economy until 2026 at which time a variety of factors --- starting with the decline of the dollar --- will cause a collapse. That may seem like a long time from now, but twelve years can go by quickly. In the meantime, there’s an opportunity to make hay while the sun shines and incorporate more risk-averse investment strategies as time goes by.
As for those interested in what’s happening now, Tom Lee, the former equity strategist at JP Morgan now runs his own firm, Fundstrat Global Advisors. He predicts that the S&P 500 will hit 2,325 by the end of this year. Higher wages, government spending, a flat dollar helping our exports and several other factors contribute to this prediction. These include, as it happens, one of my favorite components of behavioral finance which is the irrational behavior of investors. “The market rises on a wall of worry,” is a phrase that describes the current reluctance for the market to break through the 2015 record high, but that just sets the stage for pressure to spool up as the crowd’s behavior responds to increasingly apparent economic gains in the months ahead.