| Friday, April 11, 2014 | Issue #2269 | |
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This Bull Market Isn't Just Running On Easy Money Alexander Green, Chief Investment Strategist, The Oxford Club
 Over the last five years, U.S. large cap stocks have more than doubled. U.S. small cap stocks have more than tripled. But is this heady performance due to nothing more than massive accommodation from the Federal Reserve?
Hardly. Yet that was the contention of a hard-money investment analyst who interviewed me this week. So I tried to set him straight with the facts...
Inflation - the great enemy of both stock and bond investors - is low. The economy - following the most severe economic downturn since the Great Depression - is finally gathering strength. Consumer spending is up 3.3%. (The best number since 2010.) Unemployment is high but coming down. The real estate market is on the rebound. U.S. household net worth just hit an all-time high of more than $80 trillion. Corporate balance sheets are plenty healthy with more than $2 trillion in cash. And we are in a period of record corporate profits and record profit margins.
Unfazed, my interviewer merely claimed that all of these positives - including record corporate profits - are due to nothing more than the Fed's super-easy monetary policies.
He isn't just a broken record. He's uninformed.
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Sure, I'll concede the obvious. Zero interest rates and the Fed's quantitative easing programs have been rocket fuel for the stock market. It makes stocks (and particularly stock dividends) attractive relative to bonds and cash. It also makes it cheaper for consumers, businesses and Uncle Sam to borrow.
Raining on the Apocalypse
With many hard-money types, you get the distinct feeling that the Fed's heroic efforts to jump-start the economy are some sort of crime. As if we should have let the economy teeter off the edge of the abyss a few years ago. The doomsayers were so close to having their decades-old nightmare predictions finally come true and then the Fed went and spoiled it all.
The problem with these folks is they catalog and emphasize all the negatives and give short shrift - or don't even understand - the positives. Record corporate profits are due to a lot more than zero short-term rates and quantitative easing.
American productivity has increased exponentially over the last three decades. Part of this is due to technology and automation. Part of it is due to the adoption of more efficient business practices. Part is due to overseas outsourcing. But according to the U.S. Labor Department, from 1980 to 2009 the productivity of the American worker increased 40%, too.
We are also benefiting from globalization. Yes, this has been a sluggish five years for U.S. economic growth. But more than three-quarters of the world's population live in emerging markets whose economies are growing between 5% and 8% a year. Major U.S. corporations - and the smaller companies that serve them - are taking full advantage.
Ongoing Innovation
Another dynamic factor is the innovation occurring in energy (hydraulic fracturing and horizontal drilling are just two examples), transportation, automation, healthcare, product assembly, information storage and retrieval, software, mobile communications, pharmacology, medical devices, and digital technology, to name just a few.
Factories used to be made up of conveyor belts and sorters. Today they are based on processors, flash memory and fiber optics. In addition, there are the wholesale changes taking place in networks, sensors, cloud computing, 3-D printing, genetics, artificial intelligence, robotics and dozens more industries.
In a recent interview, Apple founder Steve Wozniak was asked to comment on the lack of innovation in the U.S. today. Scratching his head, he finally said, "Man, I don't even know what you're talking about."
That's also the perfect response to anyone who claims this bull market is running on nothing more than easy money.
Good investing,
Alex
Editor's Note: Speaking of innovation... subscribers of Alex's popular newsletter The Oxford Communiqué were recently told about a major technology breakthrough. Not only might it revolutionize the computer industry, but its shares may rise by tenfold or more. To get the full details on America's next big innovation... click here. | |
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