Bulls Keep Charging in US Market

It’s Tuesday, which means US stocks are up again!

Overnight, the main US indices all traded higher. No one really knows why. But stocks are going up, and people just want to buy them before they go up even more.

Makes sense…

Aussie investors aren’t getting so carried away, though. Our market is struggling to break decisively past 6,000 points. Still, it will have another go today, as US stocks attempt to coax it higher.

The relative performance of US and Aussie stocks over the past two years is stark. Since the most recent leg of the global stock market rally got underway in January of 2016, US stocks have strongly outperformed our own market.

As the chart below shows, over that timeframe US stocks are up nearly 40%, while our market is up just 14%.

US stocks are up nearly 40%, while our market is up just 14% | 23-01-2018

Source: Optuma
[Click to enlarge]

What explains the difference?

After all, commodities have rallied strongly since the January 2016 low, so that should translate into good gains for the Aussie market, right?

That’s true. But while commodities are important for the Australian economy and market, they’re not the main game. The local index is still dominated by banks and financial stocks.

And given the Aussie housing market has slowed materially over the past 12 months, and has started to fall in Sydney, household debt accumulation isn’t occurring as fast as it was, which doesn’t help the banks.

In fact, I would argue that we’re starting to feel the hangover from the housing party. It’s left us with large debts and large debt servicing costs. Along with weak wages growth, that means less money to spend elsewhere. 

And now, thanks to a weakening housing market, construction activity is coming off the boil too. You might remember that housing and apartment construction was a primary driver of growth over the past few years. That’s now starting to fade.

That pretty much leaves only commodities to do all the lifting. As you can see in the following chart, the sector has outperformed strongly. The ASX 200 Resources index is up 70% compared to the broader ASX 200’s 14% move.

ASX 200 Resources index is up 70% compared to the broader ASX 200’s 14% move | 23-01-2018

Source: Optuma
[Click to enlarge]

Should you expect this outperformance to continue?

It might, but I wouldn’t bet on it. If anything, it’s probably time for resources to have a breather. 70% in two years is a great run. And unsustainable.

What about the US market?

Well, Trump’s tax cuts are a major reason behind the US markets’ strong run. Reducing company tax rates provides an immediate boost to stocks. He may have problems in many, many other areas, but Trump is corporate friendly and the stock market loves it.

Throw in the US’ large exposure to the digital revolution and you have a recipe for solid stock market gains.

The problem is when this recipe for gains morphs into something else. I don’t know that it has for sure, but it feels like the US market is taking on a life of its own. There is no balance. There are no competing or conflicting opinions. There are only bulls.

It’s starting to get the feel of groupthink. This is a dangerous sign.

As Gustave Le Bon wrote more than 100 years ago in The Crowd:

The most striking peculiarity presented by a psychological crowd is the following: Whoever be the individuals that compose it, however like or unlike be their mode of life, their occupations, their character, their intelligence, the fact that they have been transformed into a crowd puts them in possession of a sort of collective mind which makes them feel, think, and act in a manner quite different from that in which each individual of them would feel, thank, and act in isolation.

It certainly feels like a crowd mentality on Wall Street right now. The bulls are clearly in control. But the lesson throughout market history has been to resist joining the crowd at market extremes.

Is this an extreme right now?

It feels that way. Although as I’ve often said, I don’t think you’re going to see a ‘crash’ unfold. Rather, I think the odds of a decent (say, 20%) correction are increasing by the day.

If this does happen, the next problem will be avoiding the crowd-think of the panic merchants who believe we’re headed into another Great Depression…or 2008.

In financial markets, the hardest thing is keeping a level head!

Greg Canavan,
Editor, Crisis & Opportunity

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Fat Tail Investment Research.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here.

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Money Morning Australia