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 […]

Published June 12, 2017

Headlines last month were dominated by the White House with various scandals, investigations and withdrawal from the Paris climate accord. With the penchant for this White House to generate distracting news, we can expect there will be more headlines to digest.

In the past I have said that it is better to look at market fundamentals than headlines. Indeed the headlines could give you indigestion, but the market has continued its march to new highs. Other than the market, what’s up?

Market participants still believe in the Trump agenda of less regulation and a pro-business approach. This includes tax reform/cuts and a revision of Obamacare. However, the prospects for this agenda grow dimmer and dimmer, and in some cases may not happen. Still the market marches on. Gross domestic product is barely growing, at less than 2 percent annually, and shows signs of faltering. The Federal Reserve promises several rate increases, perhaps as many as three, this year; yet market interest rates barely budge, with the 10-year bond about where it was when the Fed announced its previous rate increase. The dollar strengthened on the Trump election and the likelihood of interest rate increases, but the dollar has now settled down to less than it was at the time of the election in November. What gives? Interest rates go up, but they go down!!?? Banks briefly rallied after the Trump election, but have now lost all their gains as bond interest rates decline. The bond market and the equity markets are at odds. Or are they? Mr. Market can’t be wrong.

Even as we are in the ninth year of this economic recovery, and even as […]

Published May 5, 2017

Equity markets have reached noteworthy new highs year to date. The Dow was up 5.96 percent, the S&P up 6.7 percent and the NASDAQ an unusually strong 12.34 percent through April 28.

The highs came with rising volume and lowered volatility. The highs came in spite of weak GDP numbers and personal consumption numbers. The GDP for the first quarter of the year increased an anemic 0.7 percent, and personal consumption was the weakest in seven years.

Additional burdens on the market were the threat of rising interest rates and storm clouds regarding North Korea. Also, U.S. factory activity eased in April, leaving growth on solid ground, but slowing the growth trajectory. Optimism about the Trump agenda had buoyed the markets after the election, but that optimism found limits as parts of the agenda failed or were stalled.

The rising markets reflected an increased appetite for risk, which in turn is now supporting consumer spending and investment. Business investment is expected, by some analysts, to increase 5 percent over the next two years. Personal consumption is expected to increase 2 percent over the same time frame. Core inflation is expected to reach the Federal Reserve policy goal of 2 percent by 2018 and 2.1 percent in 2019. Inflation expectations will support the Fed effort to raise interest rates gradually.

The Fed is expected to raise interest rates three times this year. With one rate increase already done, two more may be in the offing. Noting slowing economic growth, the Fed passed on a rate rise in May, but left a June increase on the table. Future markets predict a 70 percent chance of a June raise and a coin flip chance of […]

Published April 7, 2017

Amid the longest bull market rally since 1928, there has been much concern about risk and how far the rally can go. The slow, grinding increase has been universally doubted by investors, and yet the rally has continued with occasional pauses and setbacks. Should investors stay in the market and experience the inevitable pullback, or get out and miss the rally?

Another possibility is that the market could pause and let the fundamentals catch up. Currently, the market’s price-earnings (P/E) ratio is about 22 times earnings versus its five-year average of 18.2. Such a lofty P/E points to a correction, but if earnings were to increase, the P/E would go down. Earnings can increase if the economy is strong and profits rise. Right now, optimism prevails.

However, there is a sharp divide among Democrats and Republicans in outlook. A recent survey by the University of Michigan showed that respondents who identified as Democrat expect an imminent recession, a higher unemployment rate, lower income gains and faster inflation. Conversely, Republicans expect strong growth in incomes and job prospects, coupled with lower inflation.

Another catalyst for a market updraft would be a tax cut, and that possibility is being discussed. Tax cuts would have a strong impact on earnings, which in turn would reduce the P/E ratio of stocks. But optimism about a tax cut got a sharp knock recently when President Trump’s move to repeal Obamacare failed to pass in the Republican-controlled U.S. House of Representatives, casting doubt on his ability to implement his overall agenda. So, with the stock market rally long in the tooth, the setback caused the market to pause.

A pause can be healthy […]

Published March 13, 2017

That question in the headline is one that I have been receiving from clients lately. From what I read and see, the stock market’s future is on a lot of people’s minds, and with good reason.

First of all, the market has a history of crashing from time to time – often without warning, like the time Alan Greenspan 72 days into his term as Federal Reserve chairman unexpectedly raised interest rates by a quarter point in October 1987. The market dropped 22.6 percent in one day and dropped more in ensuing trading sessions. The dot-com bubble and the 2007-08 crash are other examples. These events have seared investors’ minds, and so they are wary, as they should be. In a series of slow-grinding moves, this market recovery has gone on for the second-longest time since 1928. Investors begin to wonder if it will continue. Should you be in the market as it climbs to new highs, or drop out of the market in anticipation of a drop? To be in the wrong place at the wrong time can be expensive.

Let’s look at what we know. The long-term trajectory of the stock market is up and to the right on a graph. On an annual basis, the market rises about 75 percent of the time. An investor is betting on the long-term growth of the U.S. economy, which is almost a given, and an investor’s stock selection is a bet on good management, which, while not a given, is more common than not. Those crashes we talked about barely show up on any long-term chart.

The market has been rising for a long time and […]

Published February 10, 2017

Way back in what now seems like the dark ages, the world experienced a financial crisis. The crisis slammed every portion of the globe, and it persisted. From governments down to the bottom of the socioeconomic structure, both assets and jobs were lost. At about this same time, the Middle East was imploding in revolution. These two events would coalesce at a later date in worldwide turmoil.

The recovery from the economic crisis was slow and uneven. Many people who lost their jobs remained unemployed. The percentage of the workforce actually working stayed low. People at the upper end of the economic spectrum found that their assets recovered, as the Federal Reserve kept interest rates low by historical standards and kept them low for a long time. People out of work noticed the disparity. Those with good jobs and their own homes did not notice so much.

As the Middle East disintegrated, with country after country attempting to throw off repressive dictatorships, vast numbers of refugees were created. Many of these refugees sought new lives in countries with stable governments in Europe and elsewhere. Some countries said they would accept displaced people in a humanitarian gesture, but the numbers of refugees were overwhelming. Europe built walls and obstructions to keep the refugees out, because with high unemployment, it did not have much to offer in the form of jobs or opportunity.

Internally, Europe was forced to reinstitute border controls, which had been abandoned with the adoption of the European Union. This was very expensive to people and to commerce. The controls threatened the breakup of the EU. The U.S. pledged to take refugees, but with a […]