Last week, in my Market Outlook for 2017, I summed up my expectations for the New Year by saying, “My outlook for 2017 is very positive.”
In the comments section at the end of the Outlook, reader James commented:
“It is going to be a year of turmoil. One shock after another. And you end up, “My outlook for 2017 is very positive …”Oh my! For me, it is: “BE PREPARED … for the worst!”
I agree with being prepared for the worst, because there are hurdles, sinkholes, and black swans out there. However there’s one gigantic market reason and three “Trump card” reasons why I’m optimistic about 2017 and beyond.
When I say gigantic, I mean the market can easily double, in a matter of years, not decades.
The reason is simple. But it’s not mainstream news, and only a few analysts realize what’s happening – which is why hardly anyone knows the truth about it.
Cheap Money and Shrinking Markets
The truth is U.S. markets are shrinking, fast. And starting any day, the speed at which they’re shrinking is about to accelerate.
It’s simple: more capital chasing fewer and fewer shares will drive markets higher and higher.
Here’s the math and reasons why U.S. stock markets are shrinking.
Because the economy hasn’t been growing robustly, corporations aren’t incurring capital expenditures to build plants, buy equipment and hire workers to grow their producing capacity.
Instead of spending on capex, they’re buying back their own shares and shrinking the number of shares in the marketplace.
And because the economy hasn’t been growing while we’ve been battling deflation, the Federal Reserve’s been keeping interest rates near zero.
That’s made it easy for corporations generating profits, as well as corporations with declining earnings, to borrow cheaply in order to buy back their shares.
2015 saw a record $572 billion worth of shares buybacks by U.S. corporations. The total for 2016 won’t be far behind that when it’s tallied sometime this January. According to S&P Dow Jones Indices from 2009 through September 2016, companies bought back just over $3.24 trillion worth of their outstanding stock.
Cheap money and the ability to borrow for next to nothing in the bond market also fuels mergers and acquisitions activity, shrinking the amount of stock available to investors.
Since 2000 there are actually one-third fewer companies traded on U.S. stock markets.
Not only are buybacks, mergers and acquisitions (M&A’s) shrinking the number of shares and companies available to invest in… IPOs are virtually non-existent.
From 1980-2000, an average of 311 companies came to market annually. In 2015, only 170 new companies made it onto a U.S. exchange, down 38% from 2014. In 2016, that number fell 35%, meaning only 111 companies debuted last year.
Meanwhile, U.S. GDP in 2000 was $10.28 trillion and, in 2016, it’s estimated to be $18.56 trillion (an 80% increase).
The Federal Reserve alone created nearly $4 trillion worth of “new money” since the credit crisis. That’s on top of capital generated by stock market gains, corporate profits, and capital creation devices like leverage.
More capital chasing fewer shares, more demand and less supply… This will push markets a lot higher.
That alone is gigantic – and the principal reason I’m optimistic markets are capable of doubling within a matter of years.
The Three Trump Cards
On top of that fundamental truth, there are three “Trump cards” about to be played that will accelerate the availability of capital and simultaneously accelerate the volume of share buybacks.
- The Donald’s first card trick could be a tax cut.
A tax cut – whether it’s a personal tax rate cut, a corporate tax rate cut, or more likely both – will generate more capital. More capital in the hands of corporations will mean more buybacks. More capital in the hands of private investors will find its way into rising U.S. stock markets.
- The Donald’s second card trick will likely be a tax break on repatriated corporate cash.
Estimates of how much actual cash and cash equivalents U.S. corporations have parked overseas ranges from $1-$2 trillion. Any meaningful tax holiday to lure that cash back here would see a massive amount going right into share buyback programs.
- The third card The Donald has to play is deregulation.
Smart deregulatory reforms could free up capital across the economy, which would immediately go looking for a place where it can grow. First and foremost, it would go into U.S. stocks.
If after he’s inaugurated Donald Trump wants to make a dramatic entrance, he’s got those three cards to play. The American people have made it clear they would like to see these in action, and Congress would be hard pressed not to let them be parlayed.
Those are the principal reasons I’m optimistic about 2017 and beyond.
However, there are other players around the world and here in the U.S. with their own hands to play, and some of their cards are ugly.
While optimism is warranted, so is caution, because we’re not “there” yet. Once again, in-between here and there are hurdles, sinkholes and black swans.
I’ll address them on Friday.