A lot has happened in the past few weeks. We have finally chosen two front running presidential candidates and Britain has voted to exit the European Union. We’ve now settled into the lazy, hazy, crazy days of summer, but with a stock market hovering in record territory. All of this makes me think that the Dow will probably top 20,000 this year, and may go good bit higher in 2017.
(UPDATE: The Dow finally closed above 20,000 on January 25, 2017, after spending weeks stopping just short of the mark. The high close for 2016 was 19,974 on December 20. Taking both numbers, I was off in my prediction by either 26 points, or by 25 days, depending on how you look at it. This article was originally written on July 5, 2016, and my prediction was based on nothing more than that I believed that a 20,000 close was pre-determined by the powers-that-be and not on any fundamental or technical analysis. Going forward, I have no idea where it will go from here, nor will I venture a guess.)
No, I have no special insight, nor am I remotely affiliated with anyone who does. But at the same time I think we’re at a unique time when several forces are coming together that can produce a reasonably predictable outcome – at least in the short run.
This whole topic is just my best guess. The media and the talking heads do it all the time, probably because it’s kind of fun.
With that in mind, here’s why I think the Dow will probably top 20,000 this year.
The “Yes” Vote on Brexit DIDN’T Crush the Market
The mainstream media did an outstanding job convincing us that if the citizens of United Kingdom voted in favor of leaving the European Union – commonly referred to as “Brexit” – that the sky would fall, and Western Civilization would come to an end.
But a funny thing happened: Britain voted yes on Brexit, and despite a mini-selloff that lasted all of two days, the market recovered quickly and is once again flirting with record levels. Clearly Brexit is not the threat so many thought it to be.
When the financial markets shrug off news that is widely considered to be bad, it’s usually a solid indication of higher stock prices ahead.
That isn’t to say that there won’t be significant fallout from Brexit in the future. Part of the current belief system is that Britain could still turn tail, and hold a subsequent referendum that would keep them in the EU. But if things don’t play out that way, a day of reckoning could come.
Also lurking in the shadow of Brexit is the unfolding Italian banking crisis. Reports are that the shaky Italian banking industry is currently sitting on upwards of $400 billion in nonperforming loans. The government is locked in conflict with the EU as to solutions. The government wants to use public money to bail out the banks – the Italian version of America’s TARP. Meanwhile the EU wants a much more conservative response, maybe something on the order of $40 billion out of some sort of emergency fund.
It is believed that the banking crisis will come to a head this fall. Italy will have two choices: ignore the EU mandates and pursue its own bailout plans, or hold a referendum to leave the EU. A yes vote on that referendum will add to the momentum started with Brexit. It could mean that the EU comes to a rapid end. There are popular movements in that direction in most EU member countries.
But all of that unpleasantness is unlikely to materialize in a meaningful way until well into next year. In the meantime, it appears that happy thoughts are ruling the day.
It’s an Election Year
Presidential elections fill the country with hope. Each election offers at least the potential for meaningful change in the right direction. That tends to create a more optimistic national mindset, that usually finds its way to the financial markets. The market could rise between now and the election, then continue to the 20,000 level or above on election euphoria alone. That could even continue into the early part of 2017.
There is one potential negative with this scenario however. Much like Ronald Reagan and Bill Clinton, Barack Obama is largely seen as good for the stock market. After all, the current bull market began in the early months of his first term, and has continued unabated since. We haven’t had a correction a significantly greater than 10% in over seven years.
Many analysts believe that the 1987 stock market crash was caused at least in part by the acknowledgment of investors that the Reagan presidency would be coming to an end soon. The October crash was seen as anticipation of that event.
The situation was similar with Bill Clinton. The market was already in a mild upturn when he took office in 1993, and continued nearly to the end of this presidency. Though the dot-com bust that began early in 2000 was widely attributed to excessive stock valuations, it may well also have been an acknowledgment that the Clinton presidency was coming to an end.
And so it may yet be with President Obama. The market may react to his departure with a massive selloff.
But then again, maybe not…
Hillary Will Probably Win, Reaffirming the Cherished Status Quo
Hillary Clinton has been in the national political public eye for nearly 25 years, and her positions and policies are well-known. She’s the Democratic heir apparent to a President who has been seen as good for the stock market. It’s a good bet that Wall Street appreciates this connection, and has a strong preference for a Hillary victory in November.
Donald Trump may be a consummate businessman, even a kindred spirit among Wall Streeters, but he has been largely a political chameleon throughout his very public life. That means that Wall Street and the investment public don’t know exactly where he will come down on various issues. This is especially true of those issues that have the potential to affect the current positive trend of the stock market.
The nation and the economy may have fundamental problems, but Wall Street absolutely loves consistency. Hillary is more likely to provide that than Trump.
And in a show of collective insanity, the majority of the American public don’t want real change either – in fact they fear it. What they really want is a better functioning status quo. Will we get it? Almost definitely not, but it’s the desperate hope against hope. As long as people think that a better performing status quo is a possibility, support for the presidential candidate who most closely represents the status quo is likely to be strong. And right now, that candidate unequivocally is Hillary Clinton.
Much closer to the truth is that the longer the status quo continues without major reform, the more it will continue to grow even more dysfunctional as we move forward. That’s how we got into the problems we have now. But as the saying goes, “it’s not the truth, but what the people believe that counts”. Especially at election time.
Meanwhile the mainstream media is doing its usual best to support the Democratic candidate. Have you noticed that since Clinton was declared to be the presumptive nominee after the California primary, that the media has increasingly portrayed her in a positive light, while declaring war on Donald Trump? Just scan the headlines for proof. And expect to see more of the same as we get closer to the election.
About that Email Scandal… The Republican faithful have been vested in the belief that the DOJ would bring charges against Hillary, destroying her candidacy. I never believed it would happen. Conservatives tended to gloss over the fact that the DOJ is under the ultimate authority of a Democratic White House, that is entirely unlikely to allow its party’s presidential standard bearer to go down in the flames of scandal. Given her arrogance or confidence (your party affiliation will determine which you see) it’s been clear that Clinton has known this from the very beginning.
And after today’s announcement by the FBI that charges against Clinton aren’t “appropriate”, look for a surge in her popularity. Not only should it go a long way toward improving her standing on the trust issue, but it might also make her a would-be martyr, whose innocence ultimately crushed the “Vast Right Wing Conspiracy” that sought to bring her down.
America loves an underdog snatching victory from the jaws of defeat. Hillary is anything but an underdog, but that’s how the mainstream media is likely to play it. They love to superimpose romantic/poetic narratives over all things Clinton.
A Clinton win in November – as well as the anticipation of that victory between now and election day – could power the stock market to new heights.
The Life’s Blood of Bull Markets: Low Interest Rates Continue
Though Wall Street loves to gloat about positive fundamentals driving the stock market, the real reason is something far more simple. Low interest rates drive high stock prices.
Stocks are locked in perpetual competition with interest-bearing investments. Since they come with little or no risk, a fixed income instrument paying a 10% rate of interest is strong competition against stocks. But if the same instrument is paying less than 1%, they aren’t much competition at all. When interest rates are as low as they are right now, an investor is more likely to accept the risks involved with stocks in exchange for the potential of a double-digit return.
That’s exactly the situation we’re in right now, and have been since at least 2009 when interest rates dropped to near zero levels. In fact the entire super bull market that began in 1982 has been accompanied by a long-term pattern of falling interest rates. Back in 1982, you could get U.S. Treasury bills and certificates of deposit paying 14% or more. As of July 5, 2016, rates on one year US Treasury bills are a paltry 0.43%. Rates on the 30 year Treasury bond are just 2.14%.
Rates that low represent zero competition for stocks. As long as they stay that low, the stock market should continue to show a positive bias.
But even that bias may eventually come to an end. Essentially, yields on U.S. Treasury bills are hovering just above zero. But outside the US, more than $10 trillion dollars in government debt is carrying negative yields. That means that investors are actually paying money to have it held in government securities.
No matter how governments and the media put the happy face on the current interest rate picture, it’s a clear indication of structural economic weakness. The only way interest rates could ever be this low is if the economy simply can’t tolerate higher rates. If you doubt this, consider that interest rates are now lower than what they were in the Great Depression of the 1930s.
A day of reckoning is coming, but it probably won’t hit this year. In the meantime, the subterranean interest rates will continue to feed a higher stock market.
Look for Even Higher Highs Early in 2017
Should stocks surge higher between now and the election, and particularly after it, the bull market should continue into the early part of 2017. It’s called inertia – objects in motion, stay in motion, etc.
Exactly how high it will go is anyone’s guess. I would never bet against this market, yet at the same time I don’t have a good feeling about it at all. Despite historically low interest rates, election euphoria, and the fact that Brexit didn’t destroy the world, the current calm seems to be hiding an incredible amount of fundamental weakness.
Rising debt levels, unrestrained government spending, underfunded pensions, costly military adventures, a dearth of full-time jobs, and a ongoing healthcare crisis continue to fester. Both the politicians and Wall Street have become adept at ignoring all of this, as if it isn’t happening. But it’s also clear that Wall Street detached itself from the real economy a few years ago, and cannot be seen as a reliable indicator of anything meaningful.
I have a strong sense that when this bull market finally comes to an end – and it will – the most common question will be what the hell were we thinking? And as we do, we’ll be busy inventing whole new careers for ourselves as the financial markets take out what’s left of the staggering economy. But that’s another story that I discuss throughout this website.
What do you think? Do you see the Dow topping 20,000 soon? What do you see in 2017? And what do think is really happening with this economy?