What Causes The Fall Of Great Nations? Fertility Rates, For One

What’s happening in the stock market is all about what could happen in 2020. I guess there must be an explanation for each day the market rallies. For some reason, the narrative has focused more on day-to-day speculation than even the actual news and trends. 

My 2020 investment thesis is based on renewed household formation and a resurgence in fixed-income investments. In fact, the momentum has already begun, which is why the Atlanta Fed hiked its fourth-quarter Gross Domestic Product (GDP) estimate that has soared since the November 15^th low.

Check out the individual contributions to the GDP and how strong the equipment investment is growing; coupled with intellectual property (IP), it shows that businesses are investing. Then there are residential investments, which have also made a dramatic turn higher. The sharpest improvement came from net exports (a weak dollar and trade deal).

Note: A decline in structure investments has gotten dire (no one is building old-school factories), and inventory is still expected to be negative for the quarter. 

Household Formation

For all the handwringing over what causes the fall of great nations, nothing beats low fertility rates, which hit a record low in America last year. It’s not the kind of thing that has an overnight impact, but the long-term consequences are enormous. To make up for the loss of economic activity, governments tax more and spend more, and the private sector contributes less.

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It’s happening in Japan and Western Europe, and it will slow China’s economy more than any trade war could. There are additional immigration issues that also become unavoidable because countries need people for several reasons.  (Israel has the highest fertility rate among developed nations by far.) 

Perusing data from homebuilder sentiment and housing starts and permits, it’s clear there is a groundswell of interest in demand that only comes from improving the household formation.  

Permits hit the highest level since May 2007, as every geographical region enjoyed growth, led by the Northeast, which increased 26.4% from a year earlier.

While single-family remains the largest component of housing, multifamily continues to grow faster. 

The Message of the Market

Well, the market is still attracting more buyers than sellers by margins not reflected in the slim overall gains yesterday. There continues to be a focus on the ability of the all-mighty American consumer saving some of the more beaten-down retail names, despite reports of massive price reductions and discounts.

Of the top-ten percentage gainers yesterday, eight were retailer names that have struggled:

• Advance Auto Parts (AAP)
• Newell Brands Inc (NWL)
• Ulta Beauty (ULTA)
• Macy’s (M)
• Gap Inc (GPS)
• Dollar General (DG)
• eBay (EBAY)
• Harley-Davidson (HOG)

Some of these names have a chance to make strong percentage gains from here, although most are still considered high risk in my book. I like DG, ULTA, and AAP as potential winners next year.

Are Stocks Too Damn High?

“The Rent is too damn high!”

-Jimmy McMillan

Remember when Jimmy McMillan ran for governor of New York in 2010 on the single platform of ‘rent being too damn high?’  In many ways, one could say he was a forerunner to Bernie Sanders, who thinks everything, but taxes are too damn high. 

These days, investors are saying to themselves that the market is too damn high, as there are fewer stocks that haven’t made big moves; if they haven’t, you have to wonder why not.  

Well, share prices have gone up. There is no doubt on Monday that 567 names on the NYSE and the NASDAQ closed at new 52-week highs (yesterday, 424). However, being high doesn't mean being overvalued. Moreover, having high valuation metrics doesn't mean stocks can't move higher as well.

We passed the dart-throwing phase of the 2019 rally a long time ago, but then there was too much fear that ignored underlying fundamentals. Now, the fear battle is over whether to chase or keep watching all the fun from the sidelines. 

Well, I guess Jimmy would say if you spoke to him today: “The rent got a whole lot higher, damn!” 

Today’s Session

For investors, there will be a fair amount of rubbernecking today watching the train wreck impeachment proceeding in Washington, D,C. 

I tweeted this morning, the White House is probably humming the KC & Sunshine band classic “Keep it comin love” because nothing but great things have happened for President Trump since this effort moved into full gear.

• Poll numbers surging
• Hundreds of thousands of new donors
• Millions in cash flooding into coffers

We’ll keep an eye on it, but there is little chance the proceeding impacts the stock market other than maybe help it move higher.

Blame Game

The market is hinting at a slightly higher start to the session with the noticeable exception of FedEx (FDX), which laid an egg last night, missing big time on earnings and guidance.  Other names reporting fared better including:

• General Mills (GIS)
• Steelcase (SCS)
• Cintas (CTAS)
• Paychex (PAYX)

The last time the company reported, founder Fred Smith went ballistic over tariffs, but there were other more pressing issues that hurt the company a lot more and continue to hurt the company.

I don’t see FedEx as a proxy for the US economy; although, its international exposure has weighed on performance.   Meanwhile, its intriguing that UPS shares are up 23% this year while FedEx is up 1%, but will it move into the red for 2019.

A Little Late but Still Wrong

This morning, Morgan Stanley upgraded the semiconductor sector to “in-line” from “cautious,” which is a nebulous cop-out.  The SOX index is up 58% this year.