The trumpets blared, and the traders roared and clapped in their custom hats, and as the bell rung the Dow passed 20,000.
And it was all a hyped-up event for bloviating talking heads on CNBC.
Just check out this clip of Jim Cramer:
Yeah Jim, your grandkids will be so proud that you were on TV when the Dow crossed 20,000. You’re right up there with Neil Armstrong, big guy.
Surely this even surpasses the last great market event that brought the nation together — Dow 10,000 in 1999. Who can forget where they were when that happened?
But whatever. I don’t want to be a full-blown curmudgeon. People want to feel good about themselves and what they’re doing, so sure, knock yourselves out. Just don’t let the moment linger.
The reality of this is that 20,000, in addition to being a completely arbitrary milestone, is on very shaky ground. Its short-term future is very much in jeopardy.
Any false confidence that we’re on new ground, or that anything has truly changed over the last couple months, is going to get people burned.
The Political Landscape
There is good reason why Trump’s election pushed the market up around 12%. His proposed policies would increase profits for investors. Reducing corporate and capital gains tax rates is nothing short of a windfall for stock owners.
Then there are the more populist aspects of his campaign promises. Increasing investor profits does nothing for the majority of Americans and Trump voters.
Unfortunately for the new administration, Congress is packed full of Republicans who would want to dramatically limit any increase in U.S. debt.
That means finding cuts to offset the decreased revenue. Projections can be “massaged” to do this with unrealized future tax gains from increased productivity, but there is no hiding that a drop in revenue requires less spending too.
That doesn’t mix well with Trump’s other proposals. Massive infrastructure projects, $1 trillion of which were promised, simply cannot be funded by the private sector alone.
For example, what company wants to sign a contract to repair a crumbling bridge, all while navigating a Byzantine mix of federal, state, and local regulations to recoup costs over decades through small tolls.
We’d need thousands of projects like these to be adopted to significantly reduce the role federal dollars play in transportation infrastructure alone.
Realistically, the Feds will have to pay up front for virtually all of what needs to be done, laying out the capital for it in government spending increases.
All while the U.S. government is sitting on the highest debt burden of any country with a AA+ rating, at 77% debt to GDP, almost $20 trillion in debt total, and an estimated $200 trillion in unfunded future obligations.
In short, the promises that were given on the campaign trail, once again, are going to be watered down and fall far short of expectations; Status quo for the transition from candidate to officeholder once they’re forced to work with Congress to make any progress.
The Business Landscape
There are some good signs in the economy. GDP growth can support more interest rate hikes and official unemployment is consistently soaking up some slack from people who are underemployed or aren’t looking for jobs.
Most importantly, companies are set to emerge from a roughly six-quarter earnings and sales recession, which the stock market largely ignored or glossed over.
However, the net balance doesn’t look all that great for maintaining Dow 20,000, or the current levels for any of the major indices.
International growth is tepid, to be kind, especially in Europe and in China, in spite of incredible intervention.
China has thrown trillions into its economy just to pad the fall of its GDP growth and trap it around 7%. In the process, it’s created massive zombie companies that cannot possibly address reduced debt levels without write-offs or bailouts.
Europe is debt-laden, stuck using negative interest rates to make up for full-speed central bank intervention that is effectively absorbing debt from the private sector and still can’t prevent recession.
Meanwhile on the domestic front, companies have continued to invest in themselves at all-time highs with the money that should be creating the long-term revenue growth that justifies the share buybacks.
In fact, they’re taking on even more cheap debt to do so, setting up a situation where companies are guaranteed to pay more in interest while realizing lower revenue growth, squeezing cash flows.
Check out this graph from Bloomberg to see how net fixed business investment is plunging yet again, and historically way below average.
An Uneven Reversion to the Norm
In my opinion, there is simply no way that the Dow will maintain a level over 20,000 through the year.
It seems like the equivalent of jumping for joy, then being happy you were eight feet tall. There comes a time when reality, or gravity, sinks in.
The blue chips and broader market will sink back, probably giving up about half of the roughly 12% it has gained, then it’ll keep muddling along sideways until meaningful action is taken in Congress.
As with all things in the market, it won’t equally affect all sectors. Almost all of the 30 Dow companies will slide back, along with the majority of the S&P 500.
After that, the correlation will break down as you move down the line to mid- and small-cap stocks with more specific and specialized products and services..
What will stand out are fossil fuel companies and mining companies in particular. Our editor’s portfolio recommendations are showing it.
Here is a look at how the latest company added to Resource Stock Digest Premium has done since the election.
While that 80% run is impressive enough, it is up 107% since it was added to the portfolio in October. From reading Gerardo Del Real’s research on the company, this is just the start.
