by Lance Roberts
FOMC Meeting GDP Forecast
One of Fiedler's Forecasting Rules states:
"Always be precise in your forecasts: Economists state their GDP growth projections to the nearest tenth of a percentage point to prove they have a sense of humor."
The Federal Reserve has certainly proved both points; they have been very precise in their forecasts and have consistently overstated economic strength as shown. For example, in January of 2011, the Fed was predicting GDP growth for 2013 at 4.0%. Actual real GDP (inflation adjusted) was just 2.19% for the year only missing estimates by roughly 50%. The estimates, in 2011, for long run economic growth, was 2.7%, which has now fallen to just 2.2%.
Unfortunately, 2014 is not shaping up very well either. At the beginning of 2013, the estimates for the full year of 2014 averaged 3.2%. With the first quarter of 2014 declining 2.1%, even the sharp rebound in Q2 has left the economy average only roughly 2% growth so far. Of course, since that time, the Fed has continually lowered its estimates for 2014 from that 3.2% growth rate to just 2.05% today. That doesn't suggest a massively strong rebound through the last two-quarters of the year.
Importantly, the Fed added a projection for 2017 which is just 2.3% annualized real economic growth. As shown in the chart inset, economic growth projections by the Federal Reserve are showing a continued slide in economic prosperity in the years ahead.
This view very much aligns with statements I have repeatedly made over the last three years which is that in a consumption based economy excess debt, structural unemployment and stagnant incomes retard economic prosperity. The simple fact is that when it requires roughly $4 of debt to create $1 of "real" economic growth - the engine of growth is broken.
Economic data continues to show signs of sluggishness, despite intermittent pops of activity, and the global economy remains drag on domestic exports. With higher taxes, increased healthcare costs and regulation, the fiscal drag on the economy could be even larger than expected.
What is very important is the long run outlook of 2.2% economic growth. That rate of growth is not strong enough to achieve the "escape velocity" required to improve the level of incomes and employment to levels that were enjoyed in previous decades. Also, it is important to realize that NOWHERE in these forecasts is the onset of a recession considered. Has there been a recovery in the economy? Of course, but much of it has only been statistical.
Missing The Rally
There are two very important misconceptions by the media about investing. The first, is that if an advisor/manager has a conservative or negative view on the market then that means they are sitting in cash and have missed the rally. That is simply not the case. As I addressed in "Bulls And Bears Are Both Broken Clocks:"
"In the end, it does not matter IF you are 'bullish' or 'bearish.' The reality is that both 'bulls' and 'bears' are owned by the 'broken clock' syndrome during the full-market cycle. However, what is grossly important in achieving long-term investment success is not necessarily being 'right' during the first half of the cycle, but by not being 'wrong' during the second half."
The chart below shows the complete full market cycles throughout history.
The important point that Bill is trying to make is that even if he has missed some of the gains in the market, the devastation to investors during the completion of the full market cycle will completely eviscerate any potential short-term performance lag. However, this is why media driven advice has always led investors into taking on excessive risk that eventually devastates long-term investment returns.
The second misconception, and much more important to this discussion, is that having a "sell discipline" means that you are a "market timer." This also is a fallacy.
"Market Timing" is when an individual attempts to time market movements and is either "all in" or "all out" of the market. The reality is that while some investors may be successful in such an endeavor over a short term period, it is unlikely that they will be successful over the long term. Furthermore, most individual investors have neither the time, discipline, tools or skillset necessary to attempt such an operation.
Moreover, as investors we are SUPPOSED to "buy low and sell high." Without a "sell discipline" how would one accomplish such a task? More importantly, without selling high, how is one supposed to have capital with which to buy low? This does not mean "selling everything" which is what is often believed, but rather trimming back on winners, and disposing of investments that are not working. I like to call this "portfolio management" and am contemplating patenting what is apparently a novel concept. The problem with the majority of investment advice given today is that investors should only "buy and hold." This advice is fine as long as markets are rising, however, as discussed above; it is the completion of the full market cycle that leaves individuals wanting.
"As you are already aware, I agree with the premise that as long as the markets are in a positive trend, portfolios should remain near full allocations. However, being fully allocated currently does not mean that it should always be the case. This is why I spend so much time pointing out the potential risks that exist. It is never a rising market that hurts us; it is when it stops that does."
Are Cash Dividends Per Share A Warning Sign?
One of the ongoing benefits of "cheap money" is that it allows corporations to leverage balance sheets and "manage" profitability through stock buybacks. As discussed just recently, corporate share buybacks are at their highest level since just prior to the last financial crisis.
“Companies are buying their own shares at the briskest clip since the financial crisis, helping fuel a stock rally amid a broad trading slowdown. Corporations bought back $338.3 billion of stock in the first half of the year, the most for any six-month period since 2007, according to research firm Birinyi Associates. Through August, 740 firms have authorized repurchase programs, the most since 2008."
However, companies are not just borrowing to complete share buybacks but also to issue out dividends. According to the most recent S&P 500 company filings, the level of cash dividends per share has now reached $9.76 which is the highest level on record. It is also the greatest deviation from the long-term trend of dividends per share since the financial crisis (highlighted in blue.)
One thing to note is that cash dividends per share, which are inflated due to the reduction in shares outstanding, should be driven by stronger revenue growth at the topline of the income statement. However, since 2009, sales per share have only increased by 32.37% in total (or 6.5% annually) which does not support dividend per share growth of 63.75% (or 12.7% annually.)
While I am not predicting that the proverbial "wheels are about the come off the cart," this is another in a long list of indications that value in the stock market is no longer present. Of course, this would also suggest this might be, just maybe, a time to start considering "selling high." Of course, such a suggestion is wildly ludicrous and absolutely illogical since it is widely believed that the markets will never go down...ever.