Why the 2020 stock market could blow up your 401k
By Charles A. Becco (MBA)
In October while under the shadow of a looming impeachment, President Donald Trump declared that we had ‘“the greatest economy in the history of the U.S.’ For an entire month Wall street celebrated weeks of new high prints on the SNP 500, Nasdaq and the Dow Jones Industrial Averages. Analyst after analyst affirmed that our economy is one that is mostly fueled by a healthy consumer appetite. We are also in the middle of the longest running bull market the world has ever seen. Unemployment is at an all time low (sitting comfortably at 3.4%) and Holiday Sales this past month has grown over 3.4% what could possibly be wrong with this economy?
Everything.
And if we aren’t careful it might blow up in our faces and wipe out the last bit of security we salvaged from the last financial crisis. Lets evaluate some of the factors that empowered the 28% surge in U.S Equities and why we shouldn’t we trust the flowery headlines ejaculated from the financial pornography of major press.
Low Unemployment
But what about the unemployment rate? It’s at historical lows right? Yeah but it’s more quantity over quality here. According to several reports Almost half of Americans are working low wage paying jobs. How low? According to a study from the U.S Committee on Education and the Workforce, Walmart alone cost tax payers $6.2 Billion Dollars in Tax Dollars that went to support its employees on public assistance.
Also according to a study by nonprofit New Food Economy somewhere between 10–30% of Amazon employees live on food stamps. Wages are so low that progressive senators Bernie Sanders and Elizabeth Warren have advocated for wealth taxes that do things like taxing wealthy individuals as a percentage of their accumulated wealth and taxing companies by the proportion of welfare received by it’s employees.
Low Interest Rates
The economy was also partially bolstered by interest rates that sit at historical lows .The idea behind a lower interest rate is to discourage investors from buying treasury bonds and to invest in the stock market, but we must remember that the low interest rates are direct results of efforts to bolster the economy from the last financial crisis back in 2007–2009. Efforts that were engineered to be a temporary fix during recessionary periods shouldn’t be ‘giving well’ to continuously prop up a fully functional economy. We don’t have to look far in geography or time to realize the systemic risks associated with quasi permanent clamps on interest rates. European countries and Japan has struggled with growth after going with 0 or negative yielding interest rates which ultimately forced domestic investors out of their markets and caused capital outflows outside of those countries. These junkie, whack-a-mole, quick-fix stimulus programs has done the exact opposite of their intended purpose internationally and have unnecessarily boosted the economy in the short term but will limit the Federal Reserve’s options for reprieve during an actual crisis.
Tax Cuts
Trump’s Tax cuts were touted as the machine that was going to reinvigorate the middle class. At it’s inception I remember predicting that the Trump Tax Cuts would do nothing for the American Public except add to the federal deficit and enable corporate America to write itself a blank check at the expense of the American Public. (See Article Below)
The Trump Tax cuts were not only one of the most blatant reallocations of wealth within the last decade it also empowered the 2018–19 stock market to reach new highs by enabling companies to buy back billions of dollars’ worth of their own stock at the expense of tax payers.
But to Trump’s credit putting more money into the pocket of job creators is what you do if you endeavor to give the economy a pick me up but to do so with without clear spending guidelines to redeem those tax incentives such as guaranteed wage increases, spending in research and development and minimum capital investment requirements is like giving an opiate dependent the keys to a pharmacy on a promise that after finishing up he would seek rehab.
Trade Negotiations
Another factor that boosted the economy is the back and forth trade negotiations between the U.S and China. Negotiations that has injected a surge of optimism ( and cash) into the stock market but resulted in zero tangible gains for the U.S. There have been no firm, actionable commitments from China on copyright infringement, currency manipulation, agricultural purchases however hype surrounding the negotiations has juiced an already over brought market.
The only development of note was the ‘promise’ to sign a trade deal on January 15, 2020 but critics are skeptical as to how the United States plans to enforce the deal once it has been signed. An issue of continual contention for the U.S has been China’s habit of walking back or abandoning it’s commitments. Several times when the market looked like it was about to turn over the President’s twitter account lit up with more promises of trade developments but so far, that’s all they have been. For more information you can actually back test the results o Trump’s tweets on the economy : https://www.bloomberg.com/features/trump-tweets-
The ‘Healthy Consumer’
Economics 101 says that a healthy economy is one that is driven by a healthy consumer. This past year there was a cacophony of praise heaped on how ‘healthy’ the American consumer was. During their end of year review on December 30,2019 an analyst on CNBC repeated that the ‘consumer is contributing to 80% of the economy. Those sentiments were echoed by President Trumps Director of Trade and Manufacturing Policy Peter Navarro who said ‘Consumer Spending Will Boost 2020 Economy.’
Navarro’s comment reminded me of an article published earlier in the past year that revealed the majority of Americans were one paycheck away from a financial disaster. This report echoed similar ones that exposed that if faced with a $400-$1000 dollar emergency many Americans wouldn’t be able to pay.
Keep this statistic in the back of your mind.
2019 was a year that seen holiday spending surpass the trillion dollar mark, corresponding with reports that showed holiday spending rose 3.4% higher than the season before.
So what’s wrong with this picture? Well if most Americans: are working low wage paying jobs, are supplemented by some type of welfare, are one paycheck away from poverty, can’t afford an unexpected $400-$1000 expense, then how did this ‘healthy’ consumer push last holiday shopping season over a trillion dollars?
Coincidentally Mastercard also reported that is saw credit card usage increase over 3.4% over the same season.
So our cash strapped consumer is now funding their holiday expenditures with debt. But our deliriously drunk stock market is ‘80%’ driven by a consumer who is increasingly relying on debt to meet their expenditures. Do you see the problem here? An easy credit economy over reliant on one sector is exactly the conditions that preceded the 2008 financial crisis that saw a collapse in the banking system who was over leveraged to sub prime mortgages.
Inverted Yield Curve
Another signal that a downturn is about to occur is an inverted yield curve which is the strongest predictor of a recession. An inverted yield curve occurs when short term treasury instruments give a higher return than longer term instruments. The last three recessions were preceded by an inverted yield curve. An inverted yield curve occurred back in May 2019 and has a turnaround period of about 14 months. The results are not guaranteed but it is highly probable. Please read this resource courtesy of fidelity investments.
What Now?
Billionaire businessman and investor Warren Buffet has been quoted as saying ‘we simply attempt to be fearful when others are greedy and to be greedy when others are fearful.’
The greed index has been through the roof, so according to Buffet ( and I) you should be pretty fearful. Talk to your financial planner/advisor, broker, retirement rep and ask them to rebalance your portfolio to be defensive/conservative or weighted towards cash or money market instruments. I didn’t mention what’s going in Iran because WW3 will not happen over this….In fact what’s happening in Iran will more than likely rocket us to new highs by catching overzealous bears short in a bear trap. For my more experienced readers I would look into purchasing some gold centric ETF’s, futures and short term call options in precious metals.
Anyway stay safe and heed this advice.