Buying individual stocks is a crap shoot, but the market itself is the best leading indicator around. Every investor should know what I’m about to detail.
Lately it’s been flashing green, having regained all ground lost in 2008-9, and starting to make new highs. Some people, who make their kids wear helmets and use turn signals in parking lots, worry about this. But you shouldn’t.
In case you hadn’t heard, the Dow had gained 11.25% this year and 10.9% in the last twelve months. The S&P 500 is up 10% this year and almost 12% since last March. The NASDAQ has improved 8% in 2013 and 5% in a year. The laggard TSX is ahead 2.5% in the last 90 days, while the Nikkei in Japan has given investors 19.2% this year and 23% over the past year.
These numbers are spectacular, of course. Too bad most Canadians have missed them. Eighty per cent of TFSAs are in cash or cash equivalents, and we have more money in GICs than any other single asset. These days the banks are paying 1.75% on a five-year GIC, which helps explain why most people are screwed. No wonder a Scotiabank survey just found that 64% of people “couldn’t afford” to make an RRSP contribution this year.
Also sad: Seventy per cent of people who do invest have 100% of their money in Canadian assets. Did you notice what the TSX did compared to, say, the S&P? Duh. How can we be so parochial as to not diversify?
But the point of this Easter bunny post is to explain why stock markets are doing what they’re doing. It’s not just speculation, government money-printing, greed, manipulation or high-frequency trading feeding this advance (as all the doomers we keep in this blog’s basement believe). In a word, it’s growth. In another, recovery. Markets will surely correct after one of the best starts to any year on record, but it will likely be temporary. In fact, US markets are still trading about 10% below the long-term average when measured in current corporate profits. That suggests more to come. Lots more.
At the heart of this is the US economy, so massive, diverse and powerful it has the power to eclipse European gasbagging, dictate conditions in China or drag people out of their own wretched decisions. That renaissance would occur was never in doubt, which is why I told you long ago not to bet against America. I hope you followed my suggestions. Or that you start.
Here’s why. A sampling of the latest hard news:
- The American economy is 70% comprised of consumer spending. That spending just climbed by the most in five months, reflecting more jobs and confidence.
- In fact consumer confidence has scored the biggest advance on record, exceeding all expectations. “Consumers discounted the administration’s warning about economic catastrophe following the cuts in federal spending, and consumers have renewed their expectations that job gains will accelerate in the months ahead,” Bloomberg reported.
- Consumers say they feel the best about their personal finances since back in January of 2008.
- One reason: jobs. Payrolls grew in 42 states in February and the unemployment rate declined in 22. Employers hired 236,000 people in a month.
- Texas alone found 80,600 new jobs, the biggest increase in 31 years.
- House prices in 20 American cities jumped an average of 8.1% in the last year, the biggest year-over-year advance since the real estate bubble in 2006. Property values climbed a full 1% in December alone.
- Sales of newly-built houses are the best in four years, thanks to record low mortgage rates and more jobs. This is the best two-month showing since the late summer of 2008, and is creating significant jobs for builders, home-reno retailers and furniture stores.
- And corporate profits have been robustly growing.
- Reports Bloomberg: U.S. corporations’ after-tax profits have grown by 171% under Obama, more than under any president since World War II, and are now at their highest level relative to the size of the economy since the government began keeping records in 1947. Profits are more than twice as high as their peak during President Ronald Reagan’s administration and more than 50% greater than during the late-1990s Internet boom, measured by the size of the economy.
- More meaningful, more than 66% of corporations have surpassed their sales estimates.
What this means: Companies are making lots of money not by laying people off and getting efficient but by selling more stuff to confident consumers happy about their job prospects, whose houses and investments are rising in value. This is called “recovery.” It is real. It’s sustainable.
Sure, it’s come at a cost. Government has spent trillions rekindling this growth after an epic blow-off. The overhang of debt will take a generation to reduce and keep growth below where it would normally be. There’ll be structural unemployment, a growing disparity of wealth, and North America’s demographics are negative.
So it’s not the 1950s.
But neither is it 2008. Not a prelude to another fall, but the steady and earned ascent from the last one. Those who understand this, who are careful to have balance and diversity, who see the tectonic shift from real assets to financial ones, will be rewarded. Already are. Courage.