Tuesday, January 3, 2017

U.S. Stocks Riding A Bull Market In Corruption

Rally rooted in greedy hopes, not grounded fundamentals.


By Tim Mullaney
MarketWatch
January 3, 2017

I’m an American, full of pride for President-elect Donald Trump and his big, big, 10% stock market rally since the election!

Now imagine my pride if that had actually happened. Or if the 5% gain in the S&P 500SPX, -0.46% that has happened, or even the 8% climb in the narrower Dow Jones Industrial Average DJIA, -0.29% — which has failed for the 15th day to gain the last 250 points needed to cross 20,000 — were based on fundamentals.

Instead, this recent is rooted mostly in corruption now, and the promise of corruption later. And a rally built on corruption is bound to fail. Here’s why:

Financial stocks are responsible for much of the U.S. market’s recent move, and the rally in financials is rooted in hopes for government deregulation of the industry.

There's the hope that higher interest rates will finally boost banks' interest income. There's even some fantasy belief that higher interest rates will spur loan volumes — except dramatically higher rates for business means less investment, not more. But financial stocks represent about a third of the S&P and are up 17% since the election. Take them out and there is no rally, Trump or otherwise.

Much of the rest of the rally is due to energy stocks. The money on oil now is a bet that recent OPEC production quotas will hold up. That bet has failed repeatedly — crude prices only keep up with inflation, since 1973, during brief fits of effective manipulation. Eventually, kleptocrats always choose stable home fronts over stable prices, and cheat on quotas to achieve it. They will again. Soon. Energy stocks are about 8% of the S&P 500 and are up 9.4% since the election.

Health care, too, sees investors betting on corruption in that industry. Drug stocks account for all of the gains in health-care stocks since Election Day. Meanwhile, hospital shares including HCA Holdings HCA, +0.18% are down, as are medical-device stocks such as Medtronic MDT, -0.43% and ACA-exposed Molina Healthcare MOH, -0.42% The industry caterwauled about a device tax helping to finance the Affordable Care Act, but prospective ACA repeal and Medicare cuts are apparently worse.

Drug stocks’ appeal is no mystery: The market was afraid that Democratic presidential candidate Hillary Clinton would let Medicare negotiate drug prices with drugmakers, as other nations do.

There's no mystery about why Republicans won't allow it, either, forbidding negotiation since passing Medicare Part D in 2003. The drug industry spends $250 million a year on lobbying and its campaign contributions run 3-2 in favor of Republicans. The drug rally may be small-C corruption, but it's corruption still — the kind of corruption that favors Martin Shkreli over grandma, while 82% of Americans favor Medicare negotiations.

The Dow is likely to cross 20,000, but that doesn't validate Trump. U.S. stocks tripled under President Barack Obama. They went up under former President George W. Bush, too — until they didn't — and have risen about 10% a year since 1928. They'll rise in 2017 too if corporate profits beat expectations built into prices already.

The market is usually one of many things that makes you, to borrow Trump's Twitter wording, hopeful to be American, because it's typically a monument to the creativity of our Elon Musks and Steve Jobses. Right now, something else is happening. It's ugly, it’s cynical — and it won't work.


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