3 Things for Traders and Investors to Consider in Markets

08/30/2017 2:57 am EST


Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Are investors and traders ignoring some worrisome signs? Gordon Pape, editor of Internet Wealth Builder, sums up his concerns: politics, debt, and valuations.

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Nothing seems to trouble investors these days. There was a little queasiness earlier this month over the verbal exchanges between Donald Trump and North Korea’s Kim Jong-Un but they have faded away, at least for the moment. Despite all the turmoil in the world, people continue to buy stocks as if the market will go up forever.

Who knows, maybe it will. Maybe this time it is really different. Certainly, the signs are positive. The global economy is growing more quickly than expected, but at a measured, sustainable rate. Some economists say we have entered into the Goldilocks zone.

The Wall Street Journal reported last week that for the first time since 2007, all 45 countries tracked by the OECD are on track to expand for the year, with 33 of them forecast to accelerate from a year ago. That’s the most countries in acceleration mode since 2010. The OECD said this was due to a supportive environment of low-interest-rate stimulus from central banks and the gradual fading of rolling crises that had slowed growth in various regions.

There is no sign of a recession on the horizon. Since almost all market crashes precede an economic meltdown that suggests there is no reason to expect a big sell-off anytime soon.

Consumer confidence is high. A report released this month by the University of Michigan put the current level at 97.6, the highest since January. That was way ahead of economists’ expectations. A spokesperson for the survey attributed the big gain to a more positive outlook for the overall economy plus more favorable personal financial prospects.

What it all boils down to is that no one seems very worried during these dying days of summer. Well, no one except me. There are three things that trouble my sleep at night. If you don't want to worry about them as well, then stop reading now.

Still here? Ok, here goes.

Worry #1 - politics. There are a lot of moving parts in the political arena right now, any of which could cause trouble down the road. North Korea hasn’t gone away. The civil war in Syria drags on. ISIS launches more attacks. The NAFTA negotiations are venturing into areas that could deeply impact our national well-being. The Trump White House has become a messy revolving door and the president himself is increasingly isolated and at war with his own party. Congress is gearing up for September fights over the budget, the Mexico wall, and debt ceilings that could threaten another U.S. government shutdown. I could go on, but those are enough nightmares for now.

Worry #2 - debt. Everybody owes everybody else too much money. In Canada, our household debt ratio is near an all-time high, with each of us collectively owing $1.67 for every dollar we earn. The federal government continues to rack up huge deficits, with no sign of a balanced budget on the horizon. In the U.S., the Federal Reserve Board released a report earlier this month stating that credit card debt in that country had topped US$1 trillion. China’s shadow banking system is carrying debts of about US$8.5 trillion, according to an estimate earlier this year from Moody’s Investor Service. In June, the Institute of International Finance estimated total global debt to be a mind-boggling US$217 trillion. Put another way, that’s 327% of global GDP. Some economists say all that debt doesn’t really matter. Well, it sure did in 2008. Ask the folks who used to work at Bear Sterns and Lehman Brothers or the people who lost their homes in the financial meltdown. It will catch up with us again at some point.

Worry #3 - valuations. Stocks are expensive. No one denies that. The current price/earnings ratio for the S&P 500 (SPX) is 24.45. The historic median is 14.66. Sure, the index could go higher and probably will. But the reality is the p/e ratio now is higher than it was prior to the 1929 crash. We’re not following the traditional maxim for stock market success: Buy low, sell high. Instead, we’re buying high with the hopes of selling even higher. That usually ends badly.

Having voiced all my concerns, I have to add that I don't foresee a market collapse anytime soon. But the negative forces are building and they can't be forestalled forever.

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