The Broken Record Market

Millennials don’t remember broken records. When your vinyl got a scratch on it, the needle would keep jumping and play the same song or note again. It was irritating which is why the phrase, “a broken record” is a sign of disgust with something.

Here is the market for the last five days courtesy of Ycharts.
SPY Price Chart

SPY Price data by YCharts

It’s straight up, record close after a record close. My friend Josh Brown likes to say this is not an athletic event. We aren’t fans rooting for a team we are investors. Act accordingly.  I think what we are seeing today is the effect of uncertainty.  There are a lot of positive things in the market, but they are impossible to quantify with any sort of certainty by anyone.  That leaves the landscape open to both fear mongering and rosy forecasts of which neither will probably come true.

Since 2009, the market has been fueled by cheap credit.  Risk/reward ratios are way out of whack.  Personally, I’d like to see the Federal Reserve get really aggressive and raise the discount rate to somewhere between 3-4%.  When the cost of money is zero or almost zero, people don’t value it as much and make bad decisions.  More than a few of my friends are wondering if they should take some money off the table.  They are looking at their accounts and thinking about all the times that the market turned and went the other direction.  If that is indicative of the entire herd, we could see the market take a breath.

There are a lot of psychological issues with investors and the market today.  It’s very hard to break away from them and be dispassionate.  The endowment effect is on full display.  So is confirmation bias.  Almost no amount of data can joggle the mind.  With the level of uncertainty, it’s really hard to pin down any sort of gut feel or statistical variance.  All we are left with is “the market is frothy”.  If it continues to rally, we see more froth.  If it breaks, the froth seers will say “I told you so”.  For the record, Trump haters are more bearish than Trump likers.  I think the behavioral economics piece of the marketplace is heightened.

That being said, there are a lot of unknowns in the market today.  It is virtually impossible to measure the effect of a lower corporate tax rate.  Ignore the initial bonuses being given out to employees. Those are great for employees and it’s not a token gesture.  Even Commonwealth Edison applied to lower the rate they charged customers in Illinois because of the drop in the corporate tax rate.  Internal costs of capital for corporates have dropped significantly which is another reason I’d like to see the Federal Reserve increase rates.  The only thing we know is that the drop in the rate is a net positive for corporate stocks.

You might not have noticed this because the mainstream media didn’t report it but I think it’s big news.  Trump signed an executive order paving the way for health insurance companies to offer insurance across state lines.  They will also be able to innovate and create policies that don’t have to meet all kinds of mandates.  That’s going to drop the cost to insure employees for small businesses.   Congress repealed the 1099 Mandate, the CLASS Act, the Free Choice Voucher program, Automatic Enrollment for Large Employers, the Risk Corridor program, the Individual Mandate, and the Medical Expense tax.  The Supreme Court ruled Obamacare’s mandatory Medicaid expansion unconstitutional and a federal appeals court declared Obamacare’s CSR subsidies unconstitutional.  This is great news for all businesses, but especially great for small and medium-sized ones.  That will make it easier to insure more people at cheaper rates.  Beware of politicians that want to enshrine Obamacare mandates on their states.  Again, all of this is positive for the stock market but how do you even begin to quantify it into some sort of return?

Andy Kessler wrote a great piece in the WSJ today about unicorns and IPOs.  These firms with billion-dollar valuations need to go public.  But, because the cost of capital is so cheap in private markets they don’t.  Sofbank has invested billions of dollars in a lot of startups.  As Andy Kessler writes,

One problem is that SoftBank’s $93 billion Vision Fund is bagging unicorns like Teddy Roosevelt shooting wild buffalo from his train. It put $4.4 billion into office-space provider WeWork, $2.5 billion into the Indian online retailer Flipkart, and $1 billion into Fanatics, which sells football jerseys. And don’t forget the $7 billion it just invested in Uber, shrinking the ride-sharing giant’s valuation to $45 billion from $68 billion at the previous round. Only public markets can judge whether these valuations are right.

Low-interest rates are fueling demand for initial cryptocurrency offerings (ICO) as well.  I disagree with Andy on a finer point though.  I don’t think the demand for ICOs is coming from the US.  It feels like the big demand is from Asia and Russia.  People know they need to get their money out from under the nose of a totalitarian government.  ICO’s are a pressure relief valve.  Those people have a different psychology.  If the government can capriciously take your money away, the actual value of it is closer to worthless.  You are willing to take a gamble to get money out of the country and see what happens.  If it works, great.  If it doesn’t, it doesn’t matter since you probably weren’t going to have access to it anyway.  ICO’s do seem like “get rich quick” investing.  There is no such thing.

Another concern I am hearing is just a general one. Younger people I speak with want to be “done” by the time they hit a certain age.  Meaning, they will toil at their current job until they have a large enough nest egg to do what they want to do.  Life doesn’t work that way and there are lots of curve balls that get tossed in your direction.  If you are only working for the money you will burn out.  If you are only in the market to make a quick buck, you will burn out too.