Congress Deserves a Raise
The following is part of my big weekly issue for subscribers to my Real Income Trader service. I thought it was pretty good, so I'm going to share it with you here...
Last week, in Real Income Trader Weekly #79, I told you that after two straight triple-digit losses on the Dow Industrial, stocks had worked their way out of overbought conditions and the trend was still to the upside. (Stocks can ease the pressure of overbought conditions in two ways: declining or staying stagnant. In this case, it was mostly stagnation, punctuated by a small decline.)
Stocks have rallied since then. Still, it seems like so many traders and investors are looking for the sell-off. Every time the S&P 500 goes into the red, it's like, "That's it, rally over."
So far they've been wrong.
But it begs an important question: when you hear hoofbeats, do you think zebras or horses?
It seems to me that the people who are looking for a downside move in the midst of a rally are hearing hoofbeats and think a herd of zebras is coming. But that's not what I'm hearing. I don't need to search far and wide to find the source of those beating hooves...
There's an old saying: "The trend is your friend." The message is pretty simple. Stock prices move on the path of least resistance. So if you stick with the path of least resistance, you'll be on the right side for profits. And here's a hint: that path is usually to the upside. That's not because of the Fed, or manipulation, or irrational exuberance. It's much simpler. Remember, we're talking horses here, not zebras.
In fact, I can boil it down to two factors: economic growth and liquidity.
Keep It Simple
On the economic growth front, it goes like this: We all buy food and clothes, most of us have jobs with built-in raises to offset inflation, we have kids, and then they have kids. So, economies tend to grow, and corporate revenue and profit tends to rise.
On the liquidity side, there's almost always a bunch of cash ready to be invested in stocks. Every two weeks, most of us have some dollars from our paycheck allocated to a retirement savings account. People who run a budget surplus allocate more into stocks. Companies buy back their stock. Pension funds buy stock... it's not rocket science.
Obviously, economic growth and liquidity are interdependent.
Now, every once in a while, we might see the market go on a prolonged sell-off for no good reason. But not very often. To get a good sell-off, you have to have some event or trend that threatens growth and liquidity. We don't have that in play right now. Could there be? Yes, of course. Potential disruptions to economic growth are always present. If you wanna focus on that, fine. It doesn't change the fact that the trend remains to the upside. Again, horses.
Here's another saying about trends: trends continue until they don't. I know it's obnoxious to say something so simple as if it's some great mystery revealed. But the point is, you don't have to guess. The trend will tell you when it's done. The S&P 500 will drop below resistance levels and moving averages. Breadth indicators like the advance/decline line will go extremely negative. There are more, but my point here is that it pays to keep things simple. Think horses.
Now, if you're at all listening to the financial media, you know there is concern that the things Trump has said about trade could become a problem for the U.S. economy. We'll be in a trade war with China and Mexico, the economy will tank, and we'll have a recession. The logic is sound — Trump has said things that sound like trade wars, and trade wars will hurt the economy. But this is still a case of people hearing zebras. Because Trump hasn't done anything yet. And he may not...
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Why Congress Deserves a Raise
President Trump might shoot from the hip, but for the most part, the Senate and House do not. At best, Trump can have two terms as president. But "Senator" can be a lifelong title if you play your cards right.
And you can bet those career politicians know the difference between zebras and horses. They are not going to help tank the U.S. economy if they have to face the voters for re-election in the near future.
Just look at how the Republican majority in Congress is proceeding with Obamacare. For the last few years, the GOP has staged countless votes to dismantle the Affordable Care Act. But now that they actually have the power to repeal the ACA, Republican senators are terrified they might screw up and get blamed by voters who lose coverage.
It's the same with tax reform and infrastructure spending. The Republican majority knows it can't blow a hole in the budget with a tax cut or a big spending bill. So a loss of revenue in one place has to be offset with increased revenue from another. Now you're talking about cutting spending or raising taxes elsewhere. And the potential for a screw-up increases...
This is basic checks and balances stuff. Don't screw up, and you can keep riding that gravy train. Incentivized status quo. It was a brilliant move by the Founding Fathers.
The market trend is telling us that we can count on Congress' greed and fear of falling off the gravy train to keep us safe from any big screw-ups, like a trade war. For that, congressional salaries and benefits are worth every penny. And really, if you wanna pay them even more to not screw up, I'm completely fine with that.
Until next time,
An 18-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.