February 20, 2019

The stock market is in “giddy-up” mode, posting a truly impressive eight-week winning streak that has restored almost three-fourths of the fourth-quarter losses. Funny how a retooled Fed policy and a more accommodative trade narrative can turn market lemons into lemonade. And while fourth-quarter sales and earnings are also worth crowing about, those numbers will likely take a fairly sizeable haircut in the current quarter and further out, due mostly to tougher year-over-year comparisons.

The S&P 500 is challenging its next overhead level of resistance at 2,800, where cries of an “overbought” market are sure to emerge. In fact, CNBC’s Steve Grasso reported last Friday that Goldman Sachs was reporting large year-to-date outflows, despite the run up for stocks.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary

Apparently, January 25th saw the largest single-day outflow from the aggregated funds of the SPDR S&P 500 ETF (SPY), Vanguard S&P 500 ETF (VOO), and iShares Core S&P 500 Index (IVV) on record. That statistic initially sparked some “canary in the coal mine” chatter, but it was later thought to be just a large institutional rebalancing of portfolio weighting out of equities and into bonds.

What’s interesting is that, despite those outflows, the S&P 500 closed higher on January 25th. Since then, net inflows and outflows have been fairly balanced, and the market has rallied strongly.

Investors that have fought the Fed and fought the tape or have been spooked by all the bearishness put forth by the financial media have truly missed out on a bonanza, and with momentum still very much in favor of the bulls, it would not surprise me to see a jump in inflows over the next couple of weeks as the “FOMO” (fear of missing out) crowd wanders back in and takes their position.

The Market is Ignoring Massive New Debts – For Now

Even though the major averages are trending back towards their previous highs from early October, some of the structural issues that I have talked about in prior columns are starting to get more attention. While the economy is expanding and unemployment is at historical lows, a record seven million Americans are 90 or more days behind on their auto loan payments (source: Fortune.com, February 12, 2019).

Within the various consumer debt categories, student loan debt currently has a hold on the #2 spot (behind mortgage debt), ahead of credit cards and auto loans. As of mid-2018, over 44 million borrowers owed more than $1.5 trillion in student loan debt (source: Forbes: “Student Loan Debt Statistics in 2018 – A $1.5 Trillion Crisis”). Sheila Bair, the former head of the FDIC, described the student debt problem in Barron’s last year by saying that nearly 20% of those loans are already delinquent or in default. That number could balloon to 40% by 2023, according to a report by the Brookings Institution.

The “buy now, pay later” syndrome that Americans have come to embrace is slowly creeping higher as a drain on household budgets. Everything from furniture, electronics, clothing, medical expenses, travel, eating out, and leisure are being paid for by use of credit cards in an ever-increasing trend. While they offer an artificial bump to people’s expectations for the standard of living they aspire to have, in reality debt is a long-term drain on the bank account. More Americans forego what they can afford now, in cash, but instead choose to buy whatever they want, if they think they can afford to make the payments.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

One area that rarely gets talked about is the underfunded state pension and the looming impact of what 10,000 baby boomers retiring every day has on pension funds. Moody’s Investors Service recently estimated that public pensions are underfunded by $4.4 trillion. As of January 1, 2019, every state in the Union has an underfunded pension, the worst of which is in New Jersey, where only 30.9% of the state’s pension fund is funded, with a total pension shortfall of $168.2 billion being the largest in the nation (source: MSN.com, December 17, 2018).

The Chicago Tribune recently wrote about how the decision to reduce the expected-return assumption from 7.5% to 7.0% for the Illinois Teachers Retirement System resulted in the governor calling for approximately $400 million in additional taxes. If a simple reduction of 0.5% in expected annual returns amounts to a $400 million additional tax bill, then something along the lines of a 3% return in a slow economy would imply the need for $5 billion in additional taxes on the citizens of Illinois. The following chart shows how much in taxes needs to be raised for each half-a-percentage-point in lowered returns.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

And then there is the problem of the rising cost of healthcare, which now consumes one in five American dollars, or $4.4 trillion of the $22 trillion in U.S. GDP, according to www.healthcommentary.org. High health care bills are also the leading cause of personal bankruptcy in America. An aging population that is living much longer is now colliding with the cost of expensive drugs and high-tech treatments and a society that demands premier healthcare for everyone. This is a hard topic to diagnose, but if America moves toward a single payer, the big health insurance companies will be the next “big short,” for sure.

The 2019 federal budget is forecast to be around $4.4 trillion, with only $3.4 trillion in estimated revenue – creating a $985 billion annual deficit – and that does not take into account what could be a $1 trillion infrastructure bill on the way. In fact, according to a New York Times article, “The federal government’s annual budget deficit is set to widen significantly in the next few years, and is expected to top $1 trillion in 2020 despite healthy economic growth, according to new projections from the nonpartisan Congressional Budget Office. The national debt, which has exceeded $21 trillion, will soar to more than $33 trillion in 2028, according to the budget office.”

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

So, while these topics are obviously not of any great importance to the reinvigorated stock market at this moment, they are certainly growing into trends that will be difficult to reverse in the near future, if left unchecked. America’s economy ended 2018 valued at $20.4 trillion, adding $1 trillion from 2017, which sounds solid on the surface. There is a lot of leverage in growing that year-over-year number.

For now, the U.S. stock market seems to ignore rising levels of consumer, corporate, state, and federal debt. This condition might continue for who knows how long, but it’s my view that extreme debt levels contributed greatly to ending the bull markets for stocks in Japan, Europe, and China, and that’s a template we should all pay attention to.

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. *All content of “Income Mail” represents the opinion of Bryan Perry*

Disclosures

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier’s judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor’s holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The hypothetical performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Growth Investor, Louis Navellier’s Breakthrough Stocks, Louis Navellier’s Accelerated Profits, and Louis Navellier’s Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters’ reported hypothetical performances should be considered mere “paper” or proforma hypothetical performance results and are not actual performance of real world trades.  Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters contain hypothetical performance that do not include transaction costs, advisory fees, or other fees a client might incur if actual investments and trades were being made by an investor. As a result, newsletter performance should not be used to evaluate Navellier Investment services which are separate and different from the newsletters. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or hypothetical Newsletter performance claims, (which are calculated solely by Investor Place Media and not Navellier) should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

Marketmail Archives