The S&P 500 rose to 3140.98 last week; a gain of 0.99%. It looks as if it’s clear sailing into year-end from here. It’s rare for the market to struggle this time of year. Last year was very much an exception. The S&P 500 hit a high of 2940.91 on September 21st last year. It pulled back to 2903.28 before making another run that petered out at 2939.86 on October 3rd. It was all downhill from there after that failed attempt at a new high. The market ended November of last year around 2760, peaked at 2800 on 3 December and didn’t bottom until it hit 2346.58 on December 26th, some 454 points lower. The 16% decline from 3 December to 26 December was frightening and unusual for any time of year, let alone for December.

The economy is still slowing but perhaps not as much as previously thought. The Atlanta Fed’s GDPNow Q4 forecast has risen to 1.7% from 0.4% just eight days earlier. Earnings are still expected to grow a meager 0.7% in 2019, but also still expected to rise between 8% and 10% in 2020 (unlikely). The China trade war still looms, and any deal is increasingly unlikely to happen before the Presidential election – other than perhaps a face-saving “no-real-deal” deal. There is evidence that the trade war is impacting retailers and consumers alike, which means the war may help keep a lid on GDP growth at least through the first half of next year. Specifically, retail inventories are rising faster than expected. The Census Bureau on Tuesday said retail inventories rose 0.3% in October from a year earlier, according to Barron’s, three times the rate economists polled by Bloomberg anticipated and the fastest pace of growth since July. It’s believed that at least some of the build-up is intentional as retailers attempt to get in front of another round of tariffs set to kick in on 15 December. The U.S. is planning on raising tariffs by 10% on some $156 billion in goods including smartphones, laptops, toys, and videogames. 

However, the rise in inventories might not be entirely intentional. It appears consumers may also be reducing spending as confidence wanes. For instance, consumer confidence in November fell to the lowest level since June, the Conference Board said Tuesday, with its gauge of current conditions deteriorating significantly. As well, fewer Americans are quitting their jobs, Labor Department data show, a sign that workers aren’t as optimistic about finding a new job quickly. 

Nevertheless, December is likely to be a pretty typical month for the S&P 500; an upside bias with volume dwindling into the holidays and a Santa Claus rally in the offing. The Federal Reserve has the liquidity hose turned on full, which should put a floor under the market as long as the Fed keeps buying $30 billion in Treasury bills monthly. On the other hand, an economy expected to only grow 1.7% in 2020, with consumers perhaps turning cautious, could offset the liquidity pump sufficiently to keep the market range-bound through the first half of next year. Rich valuations may also keep a lid on the stock market for the foreseeable future. A more typical 14.4x year ahead earnings put the S&P 500 at only 2462, some 22% below current levels.

I had a friend send me an article about the income disparity in the United States. The author was pointing the finger at the Federal Reserve, as he should. Income dispersion is as wide as its been since the 1920s. Societal unrest occurs when income dispersion is wide, as the have nots question why the haves are so much better off. We are seeing that today in the United States. The anger is palatable. 

The root cause of income dispersion is the easy money policy of the Federal Reserve dating back to 1987 when Allen Greenspan decided it was the Fed’s job to micromanage the economy using monetary policy. The Federal Reserve has maintained an excessively easy monetary policy for most of the last 32 years, causing asset values everywhere to rise substantially (other central banks have followed the Fed’s lead, exacerbating the rise in prices of financial assets around the world). Americans that have had the wherewithal to invest in stocks, bonds, real estate, commodities, and collectibles have prospered, their wealth growing many times over. Everyone else has had to figure out how to make ends meet given real wages that have stubbornly refused to raise any significant amount for a variety of reasons, including globalization and automation. 

The Federal Reserve’s easy money policy has had other consequences, perhaps none so dangerous as the build-up of debt. Free money has led to a giant mountain of debt that now exceeds our annual GDP, and that’s just the debt on the books. The United States currently has $22.5 trillion in debt, approximately 106% of GDP. Unfunded liabilities in the U.S. now stand at $125 trillion according to the nonpartisan Congressional Budget Office (CBO). The entire annual output of all goods and services produced in the world only comes to about $84 trillion. It’s important to remember that it’s economic activity that produces cash flow to pay back debt.

Inflation is coming in the next decade or so. The U.S. government can’t pay down the debt otherwise. Higher inflation will reduce the real debt burden to a more manageable level over the years. People on fixed incomes and poor people will suffer the most from a rising general price level. Eventually, the transfer of wealth from the creditor to the debtor will allow the U.S. government to meet all its obligations in dollars that no longer buy anything close to a dollar’s worth of goods and services.

Meanwhile, the have nots will not go quietly into the night. They are increasingly demanding their share. My niece is a very smart, well educated young lady who attended UMass and is currently in medical school at UVA. She told me with a knowing grin a few weeks ago that there was plenty of money for Medicare For All because the U.S. government didn’t need to pay back its debt. She meant it.