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S&P 500 Rising Trend

February 26, 2021

The S&P 500 is experiencing a rising trend - but is the market reflecting economic fundamentals? Catch our newest TrendsTalk episode with ITR CEO and Chief Economist Brian Beaulieu to learn more.



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Transcript by Rev

Hello. I'm Brian Beaulieu, CEO and chief economist at ITR. Thank you for joining us for our TrendsTalk. Just briefly, we're going to talk about this wonderful S & P 500 rising trend that we're in. It's a tale of two cities. It really is. We're frequently asked, is the market reflecting economical fundamentals or is it divorced from economic fundamentals? And that's a legit question. On the one hand, it's quite divorced from the fundamentals of profitability. We've all been taught along the way that ultimately, a stock's price reflects its profitability or discounted future value of its profitability. But when you look at the profitability trends in the United States, you look at the probability of that profitability trend for corporations, probably traded corporations going forward, especially in light of increasing input costs without a great deal of latitude to put your price increases because there isn't much CPI, if any CPI, inflation out there and you look at the probability of tax hikes in the future, including on corporations, none of that seems to be built into the stock market. None of that seems to be reflected in these price earnings ratios.

In fact, when we look at the Shiller cyclically adjusted price earnings ratio, it's getting dangerously high. It also tends to look frothy based on when you look at how individual investors are invested and you look at specifically the ratio between stocks and bonds, and it's getting frothy. It's probably explains why so many pundits seem to be coming out now with a very bearish sentiment. And so far everything I've said certainly lends credence to that. But I don't think it's justified as yet. And that's the other tail.

What's going on in the market makes sense relative to the massive liquidity effort engineered by the Federal Reserve. Initially, about a year prior to COVID, the [inaudible 00:02:31] was going up and it's really been accelerated ever since. That's how it's defying gravity. And from some people's perspective is we are a wash in cash. It's got to go someplace. It's not going to go into the bond market of these interest rate levels. Going into real estate also, it's why we have a real estate asset price bubble, and we have a stock asset price bubble also. And the money supply trend continues to show accelerating rise in the money supply, which means this market is going to continue to seemingly defy gravity for quite some time. We can measure. After the money supply stops accelerating on the way up, we see the change in that trend, but it hasn't happened yet, we can measure, all right, what's the normal range before you see this impact on the stock market and that impact on the stock market?

But we haven't even gotten to condition one yet, which is a change in the money supply, which tells us that there's a lot of money to be made. And so far it's been made in the momentum stocks. And this is a momentum market. That's what's keeping this up. Liquidity is feeding the momentum. There's nothing about Tesla, near term or long term, that justifies its market debt, which isn't to say you shouldn't own Tesla. I own Tesla. But it's just not a long term play. It's a short term momentum play. It's not really investing with the typical parameters of investing that many of us employ.

So what did you do with all this? You stay tuned, we'll keep you abreast of what's going on with the money supply and what that means for the stock market. And in the meantime, you start scouting around for some value stocks that you may want to trade in your momentum stocks for because there is going to be a market rotation out of momentum and into these value stocks, it looks like to us. And then you also start looking into alternative investments, like more real estate, private real estate, homes, multi-family homes, or commodities, things like that because the US dollar is also weakening. It's got at least cyclical weakness going forward in 2022 and maybe some secular weakness beyond that, all of which means that the next time the market does come down, it's going to come down hard and you don't want to be part of that declining trend.

We never advocate you get all the way out of the market. You got to be very judicious about what you're still holding though when this next bear market hits. But unlike the bears of today, we don't see it happening in 2021, not based on the liquidity trends. We've got time to figure this out. You've got time to figure this out. In the meantime, enjoy the ride. The S & P 500 is up 15.2% year over year so far, and we haven't even hit the really juicy part in terms of money supply growth. There's always a way to make money, but there's also always a way to lose money if You lose your focus. We'll help you stay focused too. It's what we do.

Thanks for listening to this TrendsTalk, watching this trends talk. We enjoy being of service to you. We enjoy being one of your trusted advisors. Take care.



Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.