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 from the expected 192,000. But the rate of unemployment fell to 3.9 percent – the lowest since December 2000. The rate of unemployment for black workers fell to 6.6 percent – the lowest ever. Wage growth was tepid at 2.6 percent.

Meanwhile, the labor pool is shrinking: 410,000 more people dropped out of the workforce, out of a total of almost 96 million employed. This shrinking labor pool is the largest reason for the drop in the unemployment rate. A shrinking labor pool is not good […]

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 mistakes and is frequently blamed for the demise of a bull market. “Bull markets don’t die of old age, they are murdered by the Fed” is a frequent adage. Lately, the Fed has been inching interest rates up. This is risky business, which can only be done with great care. Our rate of inflation is low, but approaching the Fed’s target rate of 2 percent.  While the rate of increase is not alarming, the Fed wants to stay ahead of it. The newly constituted Fed […]

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 technological advances. Despite increased automation in all sectors, the unemployment rate has declined. Wages, which had remained stagnant, have just begun to move upward. The global economy remains strong, so we can expect the U.S. economy to also remain strong.

The Fed’s favorite inflation gauge, the core personal consumption expenditure index, has not exceeded 2.5 percent in years and was 1.5 percent at the end of 2017. You might think that the new Apple iPhone X could change the inflation outlook with its starting price of […]

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! Didn’t the market hit a stumbling block and start February on a down note? What’s that all about? It is about the already jittery market getting jitterier.

First there was the Trump State of the Union address. As the address approached, investors began to worry about what would be in the speech. Fortunately, the speech was largely benign, and the market rallied.

But then there was the Federal Reserve meeting. The Federal Reserve was transitioning leadership from slow and steady Janet Yellen to a new person who […]

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, but at a slower pace.

At this time last year, the Dow was about 20,000; today it is near 25,000. The S&P has gone from roughly 2,260 to 2,680, year over year. The Nasdaq was 5,500 last Christmas and near 7,000 now. A synchronized pickup in growth around the world led stock markets to multiyear highs.

2017 was remarkable, even astonishing, for investors, as few would have predicted this outcome. Those investors who ignored the headlines and focused on the fundamentals were rewarded. The year was a […]

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 the country. President Trump, with his own multiple bankruptcies, has called himself the “king of debt,” and that may be the role he is playing now.  Republicans are typically averse to debt and fond of criticizing Democrats for deficit spending, but not this time.

So, why does the market find good news in what historically has been not so good news? It is in part because of the strong belief that the tax bill will create economic growth and more jobs, even though history has shown […]

Published November 10, 2017

With the global economy further recovering from the financial crisis of 2007-2009, equity indices around the globe pushed higher. In October, usually a bad month for markets, the S&P rose 2.2 percent as a result of strong earnings, and anticipation of tax reform. Consumer confidence, as measured by the Conference Board, hit a very high 129.9.

Personal spending rose 1 percent in September – the largest monthly gain since August 2009. Retail sales soared, rising 1.6 percent in September. The spending was partially a result of the need to replace cars and trucks damaged by hurricanes and floods. Manufacturing and service industries expanded at a robust pace. The purchasing manager index reached a 15-year peak and the service sector index reached a 12-year high. Orders for durable goods, such as defense spending, rose 2.2 percent, and it appears that growth is on track at a 3 percent clip.

Globally, the economy continued its expansion.

The Federal Reserve left U.S. interest rates unchanged, but a quarter-point increase is surely on deck for December. Meanwhile, the European Central Bank left its short-term interest rate at zero, but indicated it will wind down its bond purchases. In Japan, with inflation at 1.4 percent, the Bank of Japan left interest rates unchanged. China’s economy slowed somewhat for the month. President Xi had no comment.

U.S. corporate earnings were strong. With 81 percent of the companies in the S&P 500 reporting actual results for the third quarter, 74 percent reported positive earnings surprises and 66 percent reported positive sales surprises. For the third quarter of 2017, the blended earnings growth rate for the S&P 500 was 5.9 percent. Six sectors reported earnings […]

Published October 6, 2017

Despite numerous negative events – hurricanes, shootings and nuclear threats – the market powers on as if there are no worries. But worries abound, and that is a good thing, because they discourage “irrational exuberance.”

Analysts expect earnings to be up about 3 percent in this earnings season starting in October; that is positive, but down from the 7-plus percent we have been experiencing. However, it is likely that earnings will be somewhat higher than 3 percent – perhaps in the neighborhood of 6 percent. Earnings are unlikely to exceed what was achieved in the preceding two quarters, which would mean the pace of growth is decelerating.

Forecasts for GDP growth remain stubbornly under 3 percent, in spite of the enthusiasm for less regulation and the tax reform on Trump’s agenda. Revised second-quarter GDP came in barely higher, at 3.1 percent. The Commerce Department said that the increase was mainly the result of farmers decreasing their stockpiles less than expected previously.

On the policy front, the tax reform agenda still provides hope for the market, but failure to pass significant legislation to date casts doubt on the prospects for such reform. Time is running out and if tax reform fails to pass, the Trump agenda and, indeed, presidency may fail. At this writing, Trump has announced that he has a new tax plan, although it is Congress that will actually write the bill.

Trump’s proposal could be viewed as a plan to make a plan. By using a large font and narrowing the margins on the paper, he has expanded his tax reform proposal to nine pages. The nine pages are short on detail, which of course […]

Published September 8, 2017

Continuing a long-term rally that started in July 2009, equity markets have powered upward. The Dow Jones, S&P and NASDAQ trade near all-time highs. The recovery has been slow, but showed strength in the face of adversity several times, in particular getting wind under its wings with the surprise victory of Donald Trump as president. During his campaign, Trump made many promises, among them repealing and replacing the Affordable Care Act, tax reform and reduction of taxes, less regulation and repatriation of money held overseas. The market liked what it heard and began a powerful addendum to the existing rally.

At the same time, the global economy was recovering, which further added to the strength of the U.S. rally. But then the failure of the Republicans to pass a health care bill caused some observers to question the ability of Republicans to pass their other legislative goals, and doubts about Trump’s leadership skills set in. While optimism waned a bit, the economy powered on. The markets took strength from increasing corporate profits – 11 percent greater year over year through the second quarter of 2017.

The market worried that exogenous events might upset the trend. For instance, North Korea’s frequent missile lofts were a worry. In a period of 24 hours, North Korea sent a missile over Japanese territory and a powerful hurricane struck Texas with untold damage. At the opening of the market on that day, the Dow was down 150 points, but settled the day up 50. So powerful has been the recovery that not even two calamities in one day could derail it.

The hurricane was a gift to President Trump; it provided […]

Published August 14, 2017

For months in this column, we have urged our readers to ignore the headlines and focus instead on market fundamentals. That strategy has paid off. The White House hi-jinx have continued to make the news, but the market has moved up in an almost steady manner.

U.S. equities are up 11.59 percent from the beginning of this year through July 31, 2017, continuing the long recovery since the Great Recession. On March 6, 2009, the Dow struck its low of 6,443. It has now more than tripled in value to over 22,000, more than making up the loss. Patient investors benefited.

Three years ago we moved our assets into U.S. equities because “they were the best house on a bad block.” U.S. stocks have been the best performing asset class in the world in those three years.

As of this writing, current earnings reports show that more than 70 percent of S&P 500 companies report having beaten their estimated earnings. Their earnings have been up a robust 11 percent, with earnings now on track to grow by double digits for two quarters in a row. So, although the market is fully – even more than fully – valued, earnings growth is justifying that high multiple of trailing 12 months earnings.

There are many reasons the market keeps hitting records; certainly U.S. earnings reports are one, but other factors are at play. The global economy is recovering; this is good because a rising tide raises all boats. Companies in the S&P 500 get nearly 30 percent of their revenue overseas.

The U.S. dollar has weakened. After an initial flurry of strength after the Trump election, the dollar has dropped […]