Written by Lance Roberts, Clarity Financial
It was a close call, but Santa finally delivered with a strong rally this past week, pushing the markets to all-time highs. Interestingly, despite the “Blue Sweep” of the Georgia elections, the markets quickly turned from worrying that such would be harmful to the markets.
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Markets quickly dismissed concerns of higher taxes by justifying it with more stimulus and more significant deficits. In other words, “buy everything in sight.”
As I tweeted out on Tuesday:
While I do jest a bit, market participants quickly justify paying continually higher prices for investments.
Why not? Mainly when it’s a “Heads I win, Tails I win” market.
As I noted last week, it certainly seems as if there is no “risk” in investing. As markets continue to rise, investors are becoming increasingly confident. But therein lies the risk as confidence breeds complacency.
In the short-term, the bullish trends remain intact. After a month-long choppy process, the S&P 500 finally set a new all-time high. The good news is that short-term MACD signals and money flows are favorable, suggesting prices could rise higher in the short-term.
However, notice that while the MACD, and money flow, are positive, the market remains significantly overbought short-term. Such suggests that while markets could rise, it could be somewhat limited return relative to the risk.
On a longer-term basis, the markets remain grossly extended from long-term means. The only other times we have seen these extensions in recent years often resulted in the loss of short-term gains rather quickly.
A correction within the next 2-months would not be surprising given the deviations from long-term means. However, such does not preclude more upside first.
The Risk Of The Bullish View
As we noted last week:
“Currently, every single analyst has the same story going into 2021.
- Prepare for an economic boom.
- Interest rates will rise.
- Inflation is coming back.
- The stock market is going to 4100-4500
- Small-caps are the new ‘new trade.'”
You get the idea. Everyone is incredibly “bullish” about the coming year with hopes of more stimulus, infrastructure spending, and a vaccine.
Somehow, despite millions of people still unemployed, the economy has just shifted into a “Golden Age” not seen since the 1950s.
However, therein lies the problem.
We Can’t Go Back
There have been two previous periods in history that have had the necessary ingredients to support a rising trend of interest rates, inflation, and economic growth over an extended period.
The first was during the previous century’s turn as the country became more accessible via railroads and automobiles. Production ramped up for World War I, and America began shifting from an agricultural to an industrial economy. (Read more on why this isn’t the “Roaring 20s.”)
The second period was post-World War II. The war left America the “last man standing” after France, England, Russia, Germany, Poland, Japan, and others were devastated. It was here that America found its most substantial run of economic growth in its history as the “boys of war” returned home to start rebuilding the countries that they had just destroyed.
The U.S. is no longer the manufacturing powerhouse it once was, and globalization has sent jobs to the cheapest labor sources. Technological advances continue to reduce the need for human labor and suppress wages as productivity increases. Today, the number of workers between the ages of 16 and 54 participating in the labor force is near the lowest level relative to that age group since the late 70s.
There is also a structural and demographic problem that continues to drag on economic growth as nearly 1/4th of the American population is now dependent on some form of governmental assistance. These issues are only going to worsen due to long-term demographic trends, not only domestically but globally.
In other words, the ingredients required for sustained levels of more robust economic growth and prosperity are not available.
This discussion is continued in Trending In The Wrong Direction.
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