The National Association of Active Investment Managers currently has their highest exposure to equities in the last dozen years. They are extremely optimistic. This is partially fueled by:
- U.S. manufacturing is running flat out and is limited by not being able to hire more workers.
- Small business optimism index is at an all-time record high.
- Washington’s cuts in regulations along with personal and corporate income tax.
- The U.S. Federal Reserve not reducing their balance sheet, however, this news isn’t widely known.
After the financial crisis of 2008, the U.S. Federal Reserve increased its balance sheet by $4.5 trillion. This added liquidity to the economy and boosted all kinds of asset prices. Well, the time has come to reduce their balance sheet which will put downward pressure on all kinds of assets: stocks, bonds, real estate, etc. In September, the Federal Reserve announced the details of reducing their balance sheet starting in October 2017. I wrote about this at the time and recommended lightening up on your stock and bond exposure over the next 6 months.
Well, the Federal Reserve has NOT followed through with their plan. They were supposed to have sold off $30 billion already and an additional $50 billion by the end of January. Instead of this $80 billion reduction in their balance sheet, they’ve only sold $5.9 billion. Four months into their reduction plan and they are already 93% behind schedule.
Since the Fed isn’t putting on the brakes, along with all of the business and consumer optimism, plus the huge tax cut that will play out over the next 6 months, it’s my opinion that the stock market uptrend is far more likely to continue this year. But of course, there are always a dozen exogenous potential events to spoil the party (such as: China holds $3.1 trillion in U.S. bonds and the Chinese Central Bank is recommending slowing or halting future purchases). So ride the current stock market trend a little longer.