Wry & Dry

Is a tweet-led crash coming?

The month of January is one for the seers.  What will the market do in 2017?

Well, W&D doesn't know.  But let him give you the whisper: sooner or later the air will come out of the US share-market balloon.

Have a squiz at this chart:

US Fed assets v SPSince the GFC, the US stock market has scarcely missed a beat.  As the US Postal Service might say, "Neither snow nor rain nor heat nor gloom of night stays these couriers from the swift completion of their appointed rounds." [1]

And, in the case of the US market, neither Crimea nor Greece nor Spain nor Brexit nor Italy nor China nor Trump can slow its rise.

The S&P 500 has increased by over 150% in those eight years.   That's an average of 12.1% p.a. 

(Over the same period the ASX is up 56%, or 5.7% p.a.  As Richie might have said, "pretty poor effort, that.")

So what has driven the US stock market to these levels?  Well, it's not profit growth.

In the third quarter of 2007, the S&P 500 Index generated reported earnings (i.e. profits) of $84.92 per share.

In the third quarter of 2016 (the most recent reported quarter of final data), the index reported earnings of $89.09 per share.

Effectively, earnings are no higher than they were post the GFC.  Okay, 0.53% p.a.  Which isn't much.

Look at it another way, the recent passing of 20,000 (a meaningless milestone) by the Dow (and since fallen back slightly) caused W&D to look at the Dow (which is only 30 companies, compered to the 500 (obviously) in the S&P 500) and its component companies revenues.

Since 2011, the Dow has risen 73%.

Since 2011, the revenues of the 30 companies in the Dow have fallen 4%.

How does that work? The share price gain is because of P/E expansion.  That is a rising share price (P) with flat earnings (E) means that the P/E of the market rises:  The S&P 500 exited 2016 on a P/E of 25.8!

As the first chart shows, there is an unnerving relationship between the rise of the US market and the trillions of dollars that the Fed has pumped into the US economy.  But the Fed finished adding stimulus some two years ago and is now tightening policy.

So the US market is now in a state of suspension, having been boosted by the Fed.  Where to now?

The hope is, of course, that fiscal policy will replace monetary policy as the driver.  But the market is already way over-valued.

It seems to W&D that there is something delusional going on. 

W&D often cautions readers that "an over-valued market will correct, often for reasons unrelated directly to company profits or the economy."

Combine the market overvaluation with the preferred communication method of the new leader of the Free World being somewhat blunt and impulsive.

W&D is moved to ask: will we see the world's first tweet-led crash? 

Image result for cartoon trump tweets

[1]  Actually, the US Postal Service doesn't have an official motto.  These famous words can be found on a New York post office (James Farley, facing Penn railway station) and are a translation of a quote from Herodotus' Histories, referring to the courier service of the ancient Persian Empire:

"It is said that as many days as there are in the whole journey, so many are the men and horses that stand along the road, each horse and man at the interval of a day’s journey; and these are stayed neither by snow nor rain nor heat nor darkness from accomplishing their appointed course with all speed."

 - Herodotus, Histories (8.89) (translated by A. D. Godfrey, 1924)

Although it seems that something other than snow, rain, heat or darkness is causing problems with AustPost (or is it the international service?).  A letter posted in Jersey on 5-Dec-16 arrived in W&D's letter box in Hawthorn on Tue-3-Jan.  Must be because of Trump's election...