Washington Turmoil Can’t Keep The Dow Down. Where To Next?

Cathy Matheson:

My post of late January on the Dow 30 Index mentioned that price had reached 20,000, in spite of negative rhetoric from media pundits and some investors about an imminent implosion of markets under President Trump’s economic agenda in the months leading up to the presidential election and to that date.

So, isn’t it possible the stock market rises and falls irrespective of what happens in Washington, DC?

Monthly Chart of Dow Jones Industrial Average:

Dow Jones Monthly Chart

Notice how it still rose all during President Obama’s two terms, an era of supposed anti-growth economic policy? And as you can see, the rally after Election Day 2016 was just a continuation of the bull market. This picture puts in context the longer term market.

Here’s a closer look at the recent history. A continuation in the fourth quarter from Oct onward. Policy has no effect.

INDU Weekly Chart





Is It Time to Buy Gold?

The answer to that question is I don’t know. There are lots of advertisements and commentators advocating to buy gold (and/or silver). They assert that some event or some government is doing this-or-that and it will affect its price. Its amusing how they map some event to a change in price of gold, silver, stocks, bonds, various currencies. According to them this event causes that outcome. When I use the word “map”, I mean cause-and-effect (causations) and correlations.

For example, as soon as October, here is former Republican congressman and libertarian firebrand Ron Paul.

“If our markets are down 25 percent and gold is up 50 percent it wouldn’t be a total shock to me,” said Paul recently on CNBC program Futures Now.

I just look at prices and charts. Gold hit a low price $255.80 per ounce in 2001 then rallied for ten years, reaching $1,923.70 in September, 2011. Since that peak it fell for six years reaching a low of $1,045.40 in November, 2015. It then rose to $1,377.50 in July, 2016, then fell to $1,124.30 in December, 2016. Now its at $1,209.70.

The mind automatically searches for events during that time. US President Bush, 9-11 terrorist attacks, the wars in Iraq and Afghanistan and now the broader Middle East, the widening globalization of economies, the financial meltdown of 2008, President Obama, Brexit (Great Britain voted to leave the European Union), then the surprise election of now President Trump. The price of gold jumped after Great Britain voted to leave the European Union, hit the aforementioned high in July, 2016 but then fell again. It didn’t jump after Donald Trump beat favorite Hillary Clinton. Good luck trying to map those events to the price of gold.

If you think, “its a dangerous world out there”, that does not cut it either. Its always been. There’s always something to worry about. Why have stock markets rallied so high in such a dangerous world? The S&P 500 US stock market index rallied more than 200 percent during President Obama’s two terms. And during that time government imposed a lot of economic regulations and taxes on the American people. Yet stocks rose.

If you want to buy gold, you can do so through this convenient interface to eBay’s offerings. That link has all different sizes and shapes. Yes, you can buy gold on eBay using credit card and Paypal. This link narrows down gold for between $25 and $250.

Are stocks a sucker’s bet?

Peter Morici writes:

Investors, as opposed to traders, buy stocks in companies whose profits they expect to rise. The conventional wisdom says stock prices will follow profits up, but over the last two business cycles, that simply has not happened.

In March 2000, the S&P 500 first closed above 1500. Since corporate profits  are up 135 percent but stocks have made virtually no gain since over the last thirteen years.

Buying stocks does not seem to pay any more, because most of the increased value created by higher profits has been captured by hedge funds, electronic traders, private equity funds, aggressive M&A shops, and trading desks at investment banks, which have multiplied over the last two decades.
. . .
The ordinary investor is simply out gunned. For him stocks have become a rigged game.

Disagree. The reality is that the stock market, as represented by the S&P 500 Index, has been in a secular (long-term) bear market since March, 2000 because stocks became severely overvalued in the 1990’s. Stocks went up so high investors could not justify the reward for the risk. 2000 was the apex. They are overvalued based on various measures such as the price-to-earnings (P/E) ratio.  When stock valuations get too high stocks become too risky to hold for long periods.  Value investors demand a Margin of Safety to compensate for the risks of investing in them. During the timeframe from March, 2000 through today the stock market has traded in a broad range, and it has traversed this range up-and-down several times. These traverses are cyclical bull and bear movements within the secular bear market, just as the stock market goes up and down during secular bull markets. This is the nature of markets; a new secular bull market will emerge — sometime.

Another mistake Mr. Morici makes is conflating business cycles (“last two business cycles”) with stock market cycles. They are not the same and they do not move in tandem. The business cycle is directly related to the economy but the stock market cycle is not. As I explained above the stock market is overvalued in the view of many investors. March, 2009 saw a severe drop in the stock market, and that was the best time since March, 2000 to get invested. It remains to be seen if that was the beginning of a new secular bull market. Valuations did not hit the extreme levels in the beginning of 2009 normally associated with new secular bull markets so we’ll see.