CNBC wrote a piece titled “the glaring resemblance between 2017 and 1999” today. The financial media loves bearish headlines because bearish articles get 5x the number of clicks compared to bullish articles. It’s great for their business.
Our model disagrees. Our model states that this bull market has at least 1-2 years left (by June 1999, the bull market had less than 9 months left). But let’s put our model aside for now. Let’s examine CNBC’s argument point-by-point. Focus on the data and facts.
As an investor, you cannot cherry pick the data. You have the look at the aggregate data. The aggregate data today in June 2017 looks nothing like it did in 1999.
*The real-time state of the economy leads the U.S. stock market in the long run. (Ignore GDP. GDP is a lagging indicator.)
*It’s not just the U.S. economy that’s improving. Non-U.S. economies like Germany, China, France, Canada are all improving as well. This is a global bull market in equities.
Consumer Confidence and ISM Manufacturing
For starters, surveys and sentiment indicators like Consumer Confidence and ISM are much less important than “hard” data like Retail Sales, the Employment Report, Industrial Production, etc. Focus on what people are doing, not what they’re saying.
CNBC’s argument is that Consumer Confidence and the ISM Manufacturing Index are too high (i.e. like 1999). In the first chart, CNBC adjusted the scales. Clearly misleading.
Let’s expand the University of Michigan’s Consumer Confidence data. Don’t cherry pick the data.
You can notice several things.
- By the University of Michigan’s measurement, Consumer Confidence is lower than it was in 1999.
- Consumer Confidence is a terrible indicator for future stock market returns. It doesn’t predict bear markets in a timely manner.
Here is a chart on the ISM Manufacturing Index from Advisor Perspectives.
You can see 2 things:
- ISM Manufacturing is an extremely noisy indicator. It’s better to look at the year-over-year change in ISM Manufacturing.
- ISM can go much higher during bull markets (see 1960s-1980s).
The yield curve
We explained this in a previous post
When the Fed hikes rates, historically the yield curve will flatten. The flattening yield curve is ONLY BEARISH for stocks when it inverts. The yield curve has not inverted yet.
Even CNBC’s chart admits that the interest rate differential today is higher than it was in 1999.
CNBC is saying that “private jobs growth is too high, and it is now declining”. Here’s the chart.
Just because jobs growth is “strong” doesn’t mean that the economy is about to deteriorate. Jobs growth can remain strong for years before it starts to fall.
Yes, the best years of jobs growth in the current economic expansion are probably behind us. In the final quarter of a bull market, jobs growth tends to slow down (which is what we’re seeing today). But that doesn’t mean 2017 is like 1999. It could be like 1998 or 1997.
S&P has gone up “too much”
CNBC is arguing that the S&P’s bull market since 2009 is like its rally from 1990-2000.
This is a clearly misleading chart. The axis are completely different! The S&P has gone up 266% from 2009-present. The S&P went up more than 350% from 1990-2000! That’s almost a 100% difference.
This economy is different from 1999
There are some “glaring differences” between today and 1999. These differences mean that the economy can continue to grow for at least 1-2 years (more likely 2-3 years).
Industrial Production is lower than it was in 1999.
Year-over-Year Retail Sales growth is lower than it was in 1999.
The unemployment rate is higher (i.e. there’s more slack in the labor market). The most notable difference is U-6 unemployment, which includes workers who are part-time purely for economic reasons (i.e. they can’t find a full-time job, but would like one).
The housing market has a lot of room left for growth. New Home Sales is much lower than it was in 1999.
These 4 indicators point to the same conclusion. The economy is far from “tapped out”, and there is room left for growth. Since the economy leads the stock market, this means that the U.S. stock market’s bull market isn’t over.