I never thought that the administration in the White House really impacted the stock market. It was really all about the Fed, and the Fed has been very accommodating to the markets over the last 9 years. I had been expecting a bubble for the markets, however, while the tech stocks have been strong the rest of the markets have been slow on the uptake. Perhaps, things are changing.
Could it be that some of the policies enacted by the administration aren’t so wise? Creating a massive deficit at a time when the economy seems fine, though the GDP is not expected to grow at 2% for the last quarter. It may be too early to expect the tax cuts to start pushing economic growth, but one has to wonder since tax cuts are usually used when the economy is not doing too well. Trade tariffs also appear to be an issue and the administration appears to be gathering like-minded individuals in positions of power. Unlike past administrations, this one seems to be making economic policies that are rooted in the past, and have usually failed.
On top of all that is happening within the administration, we must remember what the Fed did after the real estate bubble of 2007-2008. The Fed chose to control interest rates, to spur the real estate market and to help Wall Street survive the most devastating recession that we have seen since the Great Depression. We really don’t know the consequences of such actions, actions that were put in place on a worldwide basis.
I have great faith in this country and its ability to create new technology, technologies that will probably blow our minds over the next decade or two. My concern is that we should be finding ways to reduce our deficits and provide a better life for the middle class. It is the middle class that spurs economic growth, however, the middle class has been going nowhere for the last 30 years. Has it all been smoke and mirrors? No, the stock markets have been driven by technology and that will continue to be the case in the future. You do need a middle class that can afford these technologies and that can drive economic growth into the 4-5% area.
As a market technician, I am not supposed to talk politics or to be event-driven in my analysis. We are better at assessing the markets and trying to uncover what is really happening technically with the markets. That being said, I’m starting to see some divergences in the markets. The tech markets have been extremely strong while the general markets have not performed nearly as well. Divergences usually are a signal that things may not be as they appear. I read that stock investors were net buyers over the last week or so, setting some records on buying. Yet the major indexes did not respond in the fashion that I would expect. Here is a look at what has happened recently.
It is clear that we are seeing divergences between the different indexes. Does this mean the end of the bull market? If we are talking about market cycles, the four-year market cycle, then I would say no. The next 4-year cycle low should occur in 2020. Markets usually have these corrections when the 200-day moving average is stretched excessively, right now we are about 40% above the 200-day moving average. If we look at 1987 we can see that we were stretched 70% above the 200-day moving average. More than likely we will see a sideways consolidation for a few months before we try to make a move higher, much like what occurred before the market top in 1987.
So, this is my best case scenario, a sideways move in the markets, followed by a top in 2019. However, I do have concerns, as I’ve pointed out. Could this all be derailed? If you are a senior and concerned about retirement, you should be as well. I don’t want to be too negative, and I don’t want to be influenced by what is happening with the administration’s policies. There are many clouds out there. It would be wise to have a good financial advisor to guide you through what should be an interesting year. Someone who is trying to protect your investments and being proactive. Trying to predict market tops, difficult to say the least.