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Barron's: Investor Stock-Buying Binge May Doom Bull-Run Rally

Image: Barron's: Investor Stock-Buying Binge May Doom Bull-Run Rally

By    |   Monday, 29 Jan 2018 12:30 PM

Consumers aren’t just spending money on clothes, cars, and whatever else catches their eye — they’re also rushing into stocks. That could augur trouble, Barron's recently warned.

Investors have put $24 billion into equities during each of the two most recent weeks, Bernstein strategist Inigo Fraser-Jenkins told Barron's in noting that it is a big change from 2017, when they withdrew $9 billion during the last six months of the year.

That’s not worrisome—yet—but if investors buy stocks at just half that rate in the next four weeks, it would be, Barron’s warned.

“We are not saying that will happen, but it quantifies how sentiment can change,” Fraser-Jenkins says.

Meanwhile, the Davos elite came away feeling relieved after President Donald Trump loudly proclaimed that “America is open for business,” and his administration is said to be readying a $1.7 trillion infrastructure plan that could be revealed next week. Party on, right?

But what about the unavoidable party hangover?

“There’s also a point where feeling good leads to bad behavior,” Barron’s explained.

To be sure, U.S. consumer spending rose solidly in December as demand for goods and services increased, but the gain came at the expense of savings, which dropped to a 10-year low in a troubling sign for future consumption and economic growth.

Rising household wealth due to record gains on the U.S. stock market as well as higher home prices likely made Americans more confident to dip into their savings to fund purchases, economists said. Savings are now at levels last seen in December 2007, when the economy slipped into recession.

“It is true that the gains in consumer confidence as well as in the stock market and housing wealth are making Americans feel much better today than they were previously,” said Eugenio Aleman, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

“That said, the U.S. consumer will need to see continuous growth in income over the year in order to be able to continue to keep up the current pace of consumption.”

The Commerce Department said on Monday that consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.4 percent last month after an upwardly revised 0.8 percent increase in November.

Last month’s increase was in line with economists’ expectations. Spending was previously reported to have risen 0.6 percent in November.

Savings fell to $351.6 billion in December from $365.1 billion in the prior month. Savings declined to $485.8 billion in 2017, the lowest level since 2007, from $680.6 billion in 2016.

The saving rate dropped to 2.4 percent, the lowest level since September 2005, from 2.5 percent in November. It decreased to 3.4 percent in 2017, a 10-year low, from 4.9 percent in 2016.

“The continued drawdown in the (saving) rate will likely limit the extent to which consumption can continue to accelerate, all else equal,” said Michael Gapen, chief economist at Barclays in New York.

 That could get even stronger if individuals with lower tax rates spend their windfalls.

Gluskin Sheff’s chief economist, David Rosenberg, notes that rising markets have made Americans feel wealthier, so they’ve been spending more and saving less. “This is a classic late-cycle development,” he says.

To be sure, U.S. technology stock funds took in more cash in the week ended Jan. 24 than in any week since the turn-of-the-century bubble, Lipper said on Thursday, offering further evidence that investors’ wariness about markets has given way to exuberance.

Tech mutual funds and exchange-traded funds (ETFs) based in the United States gulped down $1.7 billion during the week, more than in any week measured by Lipper since March 2000, Reuters explained.

Overall, U.S.-based stock funds took in $23.4 billion, the most in four weeks, the research service’s data showed. In a break with recent patterns, much of the money went to domestic stocks.

“Investors are still positive about the U.S.,” said Pat Keon, senior research analyst for Thomson Reuters’ Lipper unit.

“The whole market’s in a bubble,” he said.

For his part, Trump has taken to Twitter to tout the economy. 

"Our economy is better than it has been in many decades. Businesses are coming back to America like never before. Chrysler, as an example, is leaving Mexico and coming back to the USA. Unemployment is nearing record lows. We are on the right track!" he tweeted Sunday.

Other economic gurus are much more optimistic about the economy's future.

Larry Kudlow, the Reagan administration economist who also advised the Trump campaign, praised President Trump for his speech and other remarks this week in Davos, Switzerland.

The president brought his “America First” message to the annual World Economic Forum meeting, while also showing a willingness to co-operate with other countries. Davos has the reputation for bringing together the business and political elite to promote a globalist agenda that’s contrary to Trump’s campaign message of protecting U.S. workers from the ravages of unfair trade.

“It was very wise to go into the lion’s den,” Kudlow said on cable channel CNBC. “I liked his tone, which was cooperative, and I liked his substance, which was: ‘America’s open for business’.”

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Consumers aren’t just spending money on clothes, cars, and whatever else catches their eye — they’re also rushing into stocks. That could augur trouble, Barron's recently warned.
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Monday, 29 Jan 2018 12:30 PM
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