The current USA economic recovery counts almost 9,5 years but does not possess the characteristics of a healthy and strong recovery. The following reasons do not contribute to the continuation of Us economic recovery and the continuation of current US bull market.
The First reason is that approximately 90% of S&P 500 index gains are owed to Faang stocks and specifically year to date only the Amazon and Apple are to all-time highs and have beated their earnings forecasts for the second quarter of 2018, Netflix is in a correction area from of its all-time highs and did not beat the earnings forecasts for the second quarter, Google alphabet although beated its earnings forecasts for the second quarter is 8% down from its all- time highs and finally Facebook after its disappointing results is down from its all-time highs 22% and these data support the fall of Faang stocks index from its all-time highs almost 10%.
In other words, only Amazon and Apple boost the continuation of this rally and are responsible for the outperformance of consumer discretionary and information technology sectors.
The 50% of S&P 500 Index gains are owed to shares repurchases from its constituents, which after the fall of interest rates near to zero because of big financial crisis, they found the opportunity to borrow big amounts of cash and support the share prices of their stocks.
The global savings of big multinational companies have peaked, and the global savings of households have plummeted, which indicates high income inequality and low global growth prospects. The most negative factor that points to a future systemic problem is that 80% of big company’s global savings are invested to bonds with the majority to corporate bonds and if a recession arrives and credit spreads widen, we will become witnesses of a corporate bond bubble.
The money supply index M2 is in all-time highs, because of extensive quantitative easing globally, but now the big central banks of the world with first of Federal reserve are prepared to reduce their huge balance sheets, which will have a negative effect in the prices of bonds globally, will increase yields and the discount rates and will compress the stock prices. A reduction in money supply the most times leads to lower growth.
It took almost 9 years US inflation rate to meet the target inflation rate of Federal Reserve Bank for 3 months in a row and wages to start growing, which means that USA suffers from low productivity and this is the reason that explains the recent abrupt flattening of US yield curve this year. In other words, bond investors believe that this recovery will not last long time from now.
The current global macroeconomic environment is not so supportive. The manufacturing indexes of the most G20 countries are in a declining trend the last 3 months, Eurozone has to face a mountain of bad loans, Italy’s low productivity, huge debt and aging workforce is a bomb ready to explode, the fragile banking sectors of Greece and Italy with negative return on equity cannot be controlled, if in the meantime bursts a crisis and finally the recent all- time highs recorded numbers in US consumer confidence index and US manufacturing index of the last 14 years, mean that the best days are back and not ahead for global economy.
Although the growth investing in US stock market thrives this year ,we must not forget that S&P 500 index is a value weighted index, which means that it has a bias to be affected largely by high capitalization stocks and this is consistent with the fact that the biggest weightings in this index have the information technology,health care and consumer discretionary sectors ,which are associated with growth investing and a bad omen for this bull market is that the utilities sector the last two months has outperformed all the other 10 sectors of S&P 500 index and this implies that investors are afraid of an economic slowdown ahead.
The intermarket analysis has been totally confirmed in emerging and European markets and only US market still remains resilient, because investors want to believe that USA will continue to remain the locomotive of global growth, but this is not sustainable given USA runs twins deficits in its balance of payments, president Trump has started a trade war with the rest of the world and that USA accounts for one fourth of global growth and owes the 30% of global debt, which indicates that the biggest threat and source of global systemic risk is USA and lastly because president Trump has revealed its intention to implement a new round of tax cuts, the next downturn will be even more severe because of the growing fiscal deficit, because of the plummeting tax revenues.
Finally, another warning sign for the continuation of this economic recovery is that year to date only three commodities have posted positive performance, with oil to be the best performer for the year up almost 14,5%. Two conclusions that are revealed if someone tries to make a fundamental analysis for commodities are that industrial metals do not perform so well, which happens when the Federal reserve bank follows a restrictive monetary policy and also the projections for 2018 global growth rate are one half of the growth rate before a decade, which is not very bullish for commodities and for the inflation rate that has historically a big positive correlation with commodities prices.Trade now