Published May 11, 2018
Expectations for the market heading into 2018 were very high – that company earnings would be up 18 percent year on year. The market was stretched to meet these high expectations. Aided by the tax cut bill, actual earnings far exceeded forecasts. By early May, with most companies reporting, actual earnings were up an astounding 27 percent. Normally, one would expect the market to show a similar increase, but it did not. The market has barely moved since the start of 2018, compared with a 7 percent increase as of this time last year.
With earnings strong, the price-earnings ratio of the market dropped from over 18 times earnings to about 16 times earnings – closer to the historical average. Fixed income became a better investment than equities; even cash earned more than equities because equities remained flat since the start of earnings season. Yields on the 10-year Treasury bond rose to 3 percent, making fixed income competitive with equities. In addition, volatility rose dramatically. Was the market getting tired? Was the market tipping over?
The May jobs report came in with the number of jobs created at 164,000, down […]
Published April 6, 2018
On March 9, 2009, the U.S. equity market touched a low, having weathered the Great Recession brought on by a financial crisis. Since that time equities have climbed a wall of worry to reach new records. Frequent corrections occurred, but the market managed to overcome many hurdles and somehow reached new highs every quarter.
A slow but steady growth in the economy carried the market quarter after quarter. It was a much-hated rally, with investors always suspicious of its reliability. Economic growth was uneven, leaving out many people, but the overall economy grew. During this time earnings and gross domestic product increased, but slowly. The tepid nature of the growth may have been one reason that the rally was so unloved.
Since the election of President Trump, headline news has dominated the airwaves. In this column, we frequently said to disregard the headline news and focus on the economic fundamentals, because the fundamentals were strong. We said our growth could continue so long as we did not have policy mistakes. Policy mistakes are frequently the reason for the end of a bull market.
The Federal Reserve is a potential source of […]
Published March 9, 2018
After experiencing one of the longest bull markets in history, equity markets slipped.
Following a robust start to the new year, the markets descended into correction territory. What ensued was a period of confusion, because of the aftershock of the correction and because a new Federal Reserve chairman added to uncertainty. The market then seemed to regain its footing, recovering most of its loss. But after testimony of the new Fed chairman before Congress, the markets swooned again.
Then President Trump announced stiff tariffs on aluminum and steel imports, sending the markets down. The Dow Jones lost a total of about 1,000 points in two days and remains off of its highs.
Earnings still appear to be strong, with profits from S&P 500 stocks forecast to be up more than 16 percent in the first quarter of 2018. The rest of the year should be as strong or stronger, with the third quarter expected to see profits up almost 23 percent year over year.
Inflation remains rather tame – still under 2 percent. Indeed inflation has been moving into lower territory since 1980 due to improvements in the global supply chain and […]
Published February 9, 2018
After a 19-month melt-up, the equity market had a stunning start to the New Year. The market experienced a trifecta, beginning with the ”Santa Claus rally” during the seven-day stretch that ended Jan. 3, continuing with a rally in the first five days of 2018 and on through January, when the S&P index gained 5.62 percent.
A market axiom is that past performance is no indicator of future success. However, 29 times since 1949 all three of those events have occurred in January, and 90 percent of the time the market rose in the final 11 months of the year. The average gain was 12.9 percent.
Support for the market gains have come from a worldwide surge in growth, a weak dollar and strong earnings reports in the U.S. The U.S. manufacturing index is above 50, which signals an expanding economy. Employment numbers are growing, and wages are expected to follow. Unemployment is at historic lows, suggesting that consumer confidence will remain strong. Gross domestic product growth is expected to be around 5.6 percent – well in excess of the 2 percentish growth that we have had for years.
But wait! […]
Published January 8, 2018
Chalk up a remarkable year for investors.
At this point in time a year ago, the new U.S. president, Donald Trump, had been elected in what was considered a surprising result. A shock went through the market, as many investors considered their options amid changes in the investment climate.
The options frequently included exiting the market. Sworn into office in mid-January, President Trump offered cold comfort to the market. In a dystopian inaugural address he offered a bleak view of the U.S. While most presidents, particularly in their first term, offer promise and hope in an effort to unite the nation, Trump poured cold water on the American dream. The markets were confused and discouraged.
Still, out of this cloud of doubt, the equity markets began to show strength. While the headline news continued to be frightening, the economy was expanding. Led by technology, profits began to climb. Health care and discretionary consumer stocks added support. At the start of the year, Fact Sheet predicted 9 percent earnings growth for the first quarter of the year. Instead, earnings growth for the period increased 14 percent. The expansion continued throughout the year, […]
Published December 11, 2017
President Trump has been in office nearly a year. During that time, he has had scant legislative victories. He has attempted to roll back the signature accomplishments of former President Obama. He has generally only had success where Congress cannot intervene, even though the Republicans control both houses.
After a year of struggle, Republicans are poised to finally produce a win on a tax bill. Called a tax reduction and reform bill, it creates massive new debt for the U.S. Proponents argue that economic growth will make up the needed revenue to overcome the reductions in tax rates. History shows otherwise. Bill Dudley, president of the New York Fed, opines that the result will be even higher interest rates as the government borrows more to fund increasing deficits. Higher rates will dampen economic growth, making it unlikely that the bill will be positive for the economy.
Additionally, it is hard to see how the economy, which is operating at full throttle, can ratchet up the pace. With the unemployment rate at less than 5 percent, achieving improvement is challenging. And so, the tax bill may simply generate more debt for […]