Thoughts from Jim Puplava's recent Big Picture podcast, "The Bull Market—It's All About Liquidity," which can be listened to in full on the Newshour podcast page here or on iTunes here.
It's 2010. Economic conditions are poor, home foreclosures are at record highs, and the unemployment rate in the US is close to 10%. The constant question from clients at the time was, "Why is the stock market going up?"
Though many were predicting stocks to reverse their gains off the '09 lows and potentially correct much further, we pushed back against the dominant mindset and articulated a renewed bullish stance on stocks by writing, "The Great Reflation," in honor of J Anthony Boeckh's 2010 book of the same title.
The cornerstone message of that piece was that bull markets are primarily driven by changes in liquidity and with the "tsunami of money" created by governments and central banks in response to the 2008-2009 crisis, asset prices were likely to be propelled much higher, potentially meeting or exceeding their prior highs.
Though our bullish message in 2010 led to a slew of negative emails that central planning efforts would fail to prevent an imminent downturn, we cautioned that a massive reinflation of asset prices would not "fix" the economy nor lead to a booming recovery. Instead, booming asset prices would ultimately lead to financial instability, economic distortions, and misallocations of capital that would lead to another bust. "For now," we urged, "investors need to take advantage of the boom."
Given the need for income and importance of dividends in total return, especially in a zero interest rate world, our view since then has been clear: investors should focus their attention on high quality dividend-paying companies with stable earnings and steady payouts.
Has that view changed? No. According to Jim Puplava, founder of Financial Sense and Chief Market Strategist at PFS Group, we are entering the latter stages of the bull market, but the end is not yet.
Many of the reasons presented in 2010 for taking a bullish stance on the market—leading economic indicators (see image - LEIs in green, S&P in black), the yield curve, and credit spreads—have yet to signify the bull market is over. Credit conditions are suggesting a greater level of caution, though they are nowhere near the level of deterioration witnessed during the last market top in 2007.
Moreover, domestic economic conditions support a more constructive outlook on US equities, in Puplava’s opinion. “We still see a lot of cyclical areas of the economy…that are strong.” He points to housing, autos, and retail sales as proof, and notes that “consumer balance sheets have improved to the best levels in 15 years. Payroll growth has [also] been stronger than what we saw between 2001-2007. I’ve never seen a recession where you have strong housing starts, strong home buying, and strong auto sales.”
While Jim is not in the recession camp, he admits that we are heading into the later stages of an economic expansion where we see a tightening in credit and a peak in leading economic indicators.
Jim also gives listeners an overview of the four phases of the Fed’s tightening cycle. We are heading into phase one at the moment, and it isn’t until stage two, when the economy finally feels the negative effects of tightening, that a more defensive investment allocation is required.
And so, while there may be trouble ahead, for the time being investors should take advantage of what Jim believes are the final innings.
Listen to this full broadcast with Jim Puplava, President and Chief Investment Strategist at PFS Group, by clicking here. For a complete archive of our broadcasts and podcast interviews on finance, economics, and the market, visit our Newshour page here or iTunes page here. Subscribe to our weekly premium podcast by clicking here.
