Is The Economy Seeing Green Shoots?

To be sure, the impetus for the stock market’s most recent joyride to the upside, (a move that pushed the S&P 500 up by 6.2% in less than 3 weeks after the surprise election outcome) has been the so-called “Trump Trade.” From my seat, one of the major components of this trade has been the expectation for better days ahead in the U.S. economy.

If this rationale for higher stock prices sounds like a bunch of hooey (I’ve heard this sentiment expressed a time or two lately from my friends in the bear camp), keep in mind that the stock market tends to be a discounting mechanism for future expectations. Especially in the area of earnings, which, of course, tend to be led – at least to a certain degree – by the state of the economy. So… expectations for stronger economic growth naturally lead to expectations for improved earnings – which, of course, can lead to higher stock prices.

However, expectations for the future can only take stock prices so far. At some point, those expectations need to turn into reality. Otherwise, the gains based on a greener pastures view can be quickly erased when the green shoots turn out to be nothing but weeds.

This has been one of the reasons that stocks have been stuck in a trading range since late 2014. Generally speaking, each year, investors expected the economy to reach “escape velocity.” The thinking was that growth would pick up in the second half of each year and then would continue into the next year. But, each year those with this upbeat view of the macroeconomic world have been disappointed. And with stock valuations at elevated levels, well, a trading range has resulted. A long, frustrating, sideways trading range.

Is It Finally Over?

But now it appears that the bulls have rediscovered their mojo and stocks have “broken out” to the upside. The bulls tell us that this is the start of a new cyclical bull run. And since the average cyclical bull market that occurs within a secular bull trend is something on the order of 106% (source: Ned Davis Research), the thinking is that investors should put away their fears and just enjoy the ride on the bull train.