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Weekly Hotline


John Dessauer’s market review and update as of Wednesday March 20, 2019

            It may be hard to believe but it has been ten years since the end of the “Great Recession.” It was on March 9, 2009 that the U.S. stock market’s decline ended, and stocks turned the corner. For patient investors who held on and refused to succumb to the panicky selling, these last ten years have been rewarding. The annualized return on the S&P 500 stock index has been an outstanding +17.8%.

            Looking back at the history of bull and bear stock markets Mitch Zacks says: “Patience is almost always rewarded.” By “patience” he means holding on rather than trying to time the market. I remember the stock crash in October 1987. There was a Money Show in Orlando Florida shortly thereafter. Reporters were there to interview the proud newsletter writers and investment advisors who claimed to have correctly predicted the crash. I was not one of them. The late Charles Allmon of the Growth Stock Outlook had made the call, sold stocks and was holding cash in Treasury bills. During his interview he advised staying out of stocks and holding cash in safe securities like U.S. Treasury bills. That was bad advice. Stocks recovered quickly. Charles Allmon refused to change and held Treasury bills for years. Over the ten years following the October 1987 stock crash the S&P 500 Index returned an annualized +17.2%.

            The Charles Allmon story shows how difficult it is to get market timing right, even for an investment advisor with an otherwise outstanding long-term record. Refusing to panic and sell is almost always the better course. Following the bear market that ended in August 1982 the ten-year annualized return for the S&P 500 stock index was +17.6%. And after the high inflation stock disaster that ended in September 1974, the ten-year annualized return for the S&P 500 stock Index was +15.6%.

            It has been a great ten-year run for stocks. While the end is not yet in sight, we know there will eventually be another recession and another stock market decline. As we know, there are plenty of pessimists trying to sell us their gloomy forecasts. History tells us to ignore them. Do not sell our stocks. Instead patiently hold on. Odds are stocks will reach new highs after the next stock market decline.

            Bashing President Trump remains a popular media practice, even when they get it totally wrong. President Trump’s tax reform isn’t as broad or widespread as his opponents and the media have reported. And to the extent there are tax cuts they have not diminished government tax collections. Quite the opposite - tax revenue flowing to the Treasury is growing. The Congressional Budget Office (CBO) reported a 10% year-over-year increase in tax collections in February. This is significant because we are now getting the comparative results for the time period in which tax reform has been fully implemented. The increase in February tax collections was greater than the 7.3% spending increase. The federal government deficit declined by $12 billion in February.

            February is an important milestone because it shows clearly that reducing tax rates can result in more tax revenue collected. The key is the rate of economic growth. If lower tax rates are followed by an increase in economic activity, tax collections will rise. So, the answer to the question, will the February trend continue, is yes - IF the economy keeps growing at current rates.

            As far as our federal government deficits and our national debt are concerned the underlying problem is that spending has been soaring - up nearly 6% or $142 billion in the first five months of fiscal 2019. President Trump wants a 5% across the board spending cut.  One thing is clear: federal government spending must be brought under control and deficits must be reduced. There are limits to how much any government can borrow. Last week I wrote about the left’s MMT idea. The key to their approach is the U.S. government’s ability to borrow in U.S. dollars. However, a sub-set is that this really means borrowing from U.S. citizens and business institutions. When the Chinese buy our government bonds that is in reality a cross-currency transaction. The U.S. dollar is not the currency of China. At some point China will no longer want dollars and instead will revert to its own currency, the yuan. This is true for all foreign buyers of U.S. government debt. The left’s MMT would fail because there aren’t enough wealthy Americans with cash to finance our national government debt. And if their higher tax policies were adopted, we would increase our dependence on foreign buyers of U.S. government debt because we would be taxing more U.S. income and wealth.

            China has a growth problem. A new research paper from the University of Chicago in cooperation with three professors from the University of Hong Kong shows that China’s actual growth rate has been 2% lower than official reports from 2008-2016. The culprit has not been Beijing but provincial leaders whose promotions depend on economic success. They have exaggerated industrial output and investment to make themselves look better. The good news is that revising economic growth rates downward by reducing industrial output and investments make a smaller Chinese economy more balanced, with a greater share of domestic consumption.

            China’s official growth rate slowed last year to 6.6%, which means it really grew at a 4.6% rate. Beijing wants the economy to grow 6% this year or 4% based on the new, more accurate calculations. The main impediment to growth in China according an editorial in the Wall Street Journal is President Xi’s hostility to the private economy. His policies have marked a return to China’s old bad habits of favoring government-connected enterprises at the expense of middle-class entrepreneurs. There are reformers who are working to restore China’s successful capitalist policies. President Xi needs a boost for China’s economy. Ironically that may come from President Trump. He is pushing for far-reaching structural reforms that would require large changes in Chinese behavior. China’s reformers could use the U.S. push to push-back on China’s political bureaucratic forces in Beijing that have stymied pro-market policies.

            “The details and enforcement will be crucial, but the reforms the U.S. is seeking would do more to help China’s long-term growth rate than anything coming out of Beijing. Believe it or not, Mr. Xi needs a Donald Trump reform push.” (The Wall Street Journal March 15, 2019.)

            I will have the next market review and update for you one week from today on Wednesday, March 27, 2019.

All the best,

John Dessauer

© March 2019