But there also is a virtuous cycle arising from falling interest rates and other factors. Housing in many segments of the market is becoming more affordable and millennials who have resisted buying first homes are starting to be lured into the market. The market for mid-priced, first-time homebuyers is already heating up and the most recent report found mortgage applications were up 9 percent.
Conventional wisdom holds that consumers are in great shape. But James Macey, director of multi-asset portfolio management at Foresters Financial, noted this view is based on backward-looking metrics like the unemployment rate. Household debt currently stands at about 75 percent of GDP. That’s better than 110 percent in 2008 but, for the sake of comparison, way above 40 percent in the early 1980s. Global PMI numbers are at 32-month lows and small business optimism has fallen five months in a row.
A number of other issues are swirling around the market, Cuggino explained. If growth picks up in the second quarter, what will the Fed do? The market thought the central bank might eventually be forced to raise rates, but Fed officials surprised the bond market when they took that option off the table last week. The reversal led many to conclude the Fed’s predictive powers are not particularly impressive.
Workers are receiving healthy wage gains for the first time in this cycle and it could translate into higher inflation. Even if the Fed doesn’t see it, analysts who study the financial reports of S&P 500 companies say it is evident in their results.
“Corporate earnings are [still] growing and interest rates are reasonable,” Cuggino maintained. “Where we are makes perfect sense.”
Corporate profits are up a modest 3 percent to 6 percent this year, but companies are keeping a lot more of their profits now that they are being taxed at a 21 percent rate. With more cash flowing to their retained earnings, weak companies are in a position to rebuild their balance sheets.
Macey said that the S&P 500 is essentially flat for the past year and complacency among retail investors after a decade of double-digit gains in the S&P 500 leaves consumer psychology vulnerable in the event of another correction. Indeed, the collapse of retail sales in December, no matter how brief, shows how powerful the wealth effect has become.
Like Macey, Cuggino sees some warnings signs for individual investors. “Pay attention to the IPO market,” Cuggino said.
Institutional investors in tech companies like Uber and Lyft are looking to cash out and flip their equity to the public before the next recession hits. That’s something “you saw a lot of in the 1990s,” he continued.
Few people, including Cuggino, are suggesting that the next recession will be triggered by a 1990s-style tech bubble. High-yield corporate debt with weak covenants is seen as a far more likely culprit in the current cycle.
What about trade talks with China? Cuggino thinks that if all America gets is an agreement with China to buy a few more cars, soybeans and pork, the whole thing "will have been a colossal waste of time." But if a trade deal addresses intellectual property rights, forced technology transfers, the rule of law and market access, it could be a major win for the global economy.