Global markets have started the year behaving very well, supporting my view that we’re in the early innings of an economic boom, and we should get another big year for global stock markets.
But, as we discussed heading into the end of 2017, that view isn’t shared by Wall Street or the Fed. For 2018, the Fed is looking for just 2.5% growth. And Wall Street is looking for just 6% growth in stocks (according to this WSJ piece). That’s less than the long term average return on the S&P 500.
Both continue to, somehow, ignore (or underestimate) the influence of fiscal stimulus, which is hitting into an already fundamentally improving economy.
Wall Street was looking for 3% growth in stocks last year. We got almost 20% (better in the Dow). And the Fed was looking for 2.1% growth last year. It will be closer to 3% for full year 2017.
They thought Trump couldn’t get policies legislated. Now we have big tax cuts, meaningful deregulation, the beginnings of a government spending program (started by natural disaster aid), and a massive incentive for companies to repatriate trillions of dollars.
If we add that to an economy with near record low unemployment, cheap gas, near record low mortgage rates, record high consumer credit worthiness, record high household net worth, a record high stock market and near record low inflation, it’s hard to imagine the economy can’t do better than the long term average (3% growth) this year.
As we’ve discussed, we’ve yet to experience the explosive bounce in economic growth that is typical of post-recession environments. This is set up to be that kind of year — maybe something north of 4%, which should finally move the needle on inflation. If that’s the case, despite the quadrupling of the stock market from the 2009 bottom, money may just be in the early stages of moving out of bonds and cash, and back into stocks.
For help building a high potential portfolio, follow me in our Billionaire’s Portfolio, where you look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio of highest conviction, billionaire-owned stocks is up close to 50% over the past two years. And 25% of our portfolio is in commodities stocks. You can join me here and get positioned for a big 2018.
We are off to what will be a very exciting year for markets and the economy.
Over the past two years I’ve written this daily piece, discussing the bigslow-moving themes that drive markets, the catalysts for change, and the probable outcomes. When we step back from all of the day to day noise that has distracted many throughout the time period, the big themes have been clear, and the case for higher stocks has been very clear. That continues to be the case as we head into the New Year.
As I’ve said, I think we’re in the early stages of an economic boom. And I suspect this year, we will feel it — Main Street will feel it, for the first time in a long time.
And I suspect we’ll see a return of “animal spirits.” This is what has been destroyed over the past decade, driven primarily by the fear of indebtedness (which is typical of a debt crisis) and mis-trust of the system. All along the way, throughout the recovery period, and throughout a quadrupling of the stock market off of the bottom, people have continually been waiting for another shoe to drop. The breaking of this emotional mindset has been tough. But with the likelihood of material wage growth coming this year (through a hotter economy and tax cuts), we may finally get it. And that gives way to a return of animal spirits, which haven’t been calibrated in all of the economic and stock market forecasts.
With this in mind, we should expect hotter demand and some hotter inflation this year (to finally indicate that the global economy has a pulse, that demand is hot enough to create some price pressures). With that formula, it’s not surprising that commodities have been on the move, into the year-end and continuing today (as the New Year opens). Oil is above $60. The CRB (broad commodities index) is up 8% over the past two weeks – and a big technical breakout is nearing.
This is where the big opportunities lie in stocks for the New Year. Remember, despite a very hot performance by the stock market last year, the energy sector finished DOWN on the year (-6%). Commodity stocks remain deeply discounted, even before we add the influence of higher commodities prices and hotter global demand. With that, it’s not surprising that the best billionaire investors have been spending time building positions in those areas.
This year is set up to handsomely reward the best stock pickers.
For help building a high potential portfolio, follow me in our Billionaire’s Portfolio, where you look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio of highest conviction, billionaire-owned stocks is up close to 50% over the past two years. And 25% of our portfolio is in commodities stocks. You can join me here and get positioned for a big 2018.
Remember, this time last year, the biggest Wall Street investment banks told us stocks would do just 3% in 2017.
They were looking for about 2,300 on the S&P 500. The most aggressive forecast was 2,500 — coming from the Canadian bank, RBC (Royal Bank of Canada).
Here’s another look at the snapshot of those projections for 2017:
They undershot by a lot. The S&P finished just shy of 2,700 for the year. And S&P 500 earnings came in around $131. Wall Street was looking for $127.
But their big miss was underestimating the outlook for “multiple expansion.” The reason: They continue to underestimate the demand for stocks, in a world where ultra-low yields continue to incentivize people to reach for higher returns (i.e. opt for the choice of more risk for more return).
Investors will pay more for each dollar of future earnings if they expect to earn a higher future rate of return. And they have expected just that over the past few years, because 1) central banks promised to keep pumping up asset prices through QE and to continue warding off any shock risks that could derail the recovery for the economy and stocks, and 2) we’ve had the major shift away from austerity, which has promoted a weaker than typical recovery out of recession (and worse, stall speed growth) and toward big and bold fiscal stimulus (one that can potentially return the economy to a more normal, higher long term growth rate).
That’s why the P/E on stocks can and should rise well north of 20 times earnings in this environment, just as it has over the past three years.
The P/E on the S&P 500 was 20 in 2015, 22 in 2016 and 23 for 2017 (on trailing earnings). In each case, we came into the year, with the market undervaluing earnings — given what people have proven to be willing to pay up for them.
The market is now valuing the New Year’s earnings at 19 times earnings. And that ignores the probability that actual earnings can come in much better than estimates next year, given the corporate tax cut. That would ratchet down that “19 times” earnings valuation – making stocks cheaper.
For help building a high potential portfolio for 2018, follow me in TheBillionaire’s Portfolio, where you look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio is up 45% over the past two years. Join me here!
Last year this time, as we ended 2016, and looked ahead to 2017, it was clear that the dominant theme for the year ahead would be Trumponomics.
We had a global economy that had been propped up by central banks for the better part of eight years, and growth that was proving to be dangerously slow — with growing risks of a stall and another downward spiral.
That was clear in the summer of 2016, when global interest rates started to diving deeply into negative territory. That meant people were happy to pay governments for the security of parking their money in government bonds.
There was a clear lack of optimism about economic conditions and what the future may look like.
That changed with Trump’s election and his commitment to launch an assault on economic stagnation.
It flipped the switch on the lack of optimism that had been paralyzing business activity. And that optimism has led to a hotter economy this year than most expected, despite the lack of substantial policy action (which we didn’t get until later in the year).
So what will next year look like?
As we discussed yesterday, we have tax cuts that should drive corporate earnings and warrant another double digit year for the stock market (close to 20%).
And that doesn’t take into account the impact to corporate earnings from personal tax cuts, a healthier job market with employees that can command higher wages and companies that are confident to take cash and invest in new projects. So, by design, we have incentives coming into the economy for 2018 that will boost demand. And another pillar of Trumponomics, infrastructure, will be the focus early next year, which will fuel more jobs, more economic activity.
All of this and the Fed is projecting just 2.5% growth next year. And Wall Street and the economist community tend to anchor their forecasts on the Fed. But the Fed doesn’t have a very good record in forecasting – especially in recent history.
They overestimated growth and the outlook throughout much of the recovery period. Instead we got stagnation.
But in the past 18 months or so, they flipped the script. They became the “new normal” believers that we’re in for long-term slower growth.
With that, they underestimated the outlook for 2017, even with the prospects of fiscal stimulus coming (they ignored it, and continue to). They were looking for 2.1% growth. It will be closer to 3% for the full year 2017. And next year, while they are looking for 2.5%, we could have something closer to 4%. That’s my bet.
Remember, we’ve talked about the fundamental backdrop, with the addition of fiscal stimulus, that could have us in the early stages of an economic boom period. I think we’ll feel that, for the first time in a long time, in 2018.
Join our Billionaire’s Portfolio today to get your portfolio in line with the most influential investors in the world, and hear more of my actionable political, economic and market analysis. Click here to learn more.
While the President’s pro-growth plan had some wins this year, it was a slow start.
Going after healthcare first was a mistake. Fortunately, a pivot was made, and we now have a big tax bill delivered. And we have what will likely exceed a couple hundred billion dollars in government spending on hurricane/natural disaster aid underway (the early stages of a big government spending/ infrastructure package).
Last year this time, I predicted that Trump’s corporate tax cut would cause stocks to rise 39%. That’s a big number, that’s only been done a handful of times since the 1920s. We got a little better than half way there.
But, here’s the good news: We got there on earnings growth, ultra-low rates and an improving economy. All of that still stands for next year, PLUS we will have the addition of an aggressive tax cut that will be live day one of 2018.
With that, my analysis from last year still stands! Let’s walk through it (yet) again.
S&P 500 earnings grew by 10% this year. S&P 500 earnings are expected to grow at about the same rate next year. And that’s before the impact of a huge cut in the corporate tax rate. The corporate tax rate now goes from 35% to 21% – and for every percentage point cut in that rate, we should expect it to add at least a dollar to S&P 500 earnings.
With that, the forecast on S&P 500 earnings for next year is $144. If we add $14 to that (for 14 percentage points in the corporate tax rate) we get $158. That would value stocks on next year’s earnings, at today’s closing price on the S&P 500, at just 17 times earnings (just a touch higher than the long-term average). BUT, the Fed has told us that rates will continue to be ultra-low next year (relative to history). When we look back at ultra–low interest rate periods, the valuation on stocks runs higher than average—usually north of 20 times earnings.
If we take the corporate tax cut driven earnings of $158 and multiply it times 20, we get 3,160 on the S&P 500. That’s 18% higher than current levels. This analysis doesn’t incorporate the impact of a potentially hotter than expected economy next year (thanks to the many other areas of fiscal stimulus). So, as we’ve discussed throughout the year, the backdrop continues to get better and better for stocks.
Join our Billionaire’s Portfolio today to get your portfolio in line with the most influential investors in the world, and hear more of my actionable political, economic and market analysis. Click here to learn more.
Remember, the Fed met last week and hiked rates for the third time this year, and the fifth time in the post-crisis hiking cycle. But as we discussed, the big event for interest rates wasn’t last week, it’s this week.
The Bank of Japan meets on Wednesday and Thursday. Japan‘s policy on pegging their 10-year yield at zero has been the anchor on global interest rates (weighing on global interest rates). When they signal a change to that policy, that’s when rates will finally move – and maybe very quickly.
With that in mind, we have the stock market continuing to climb north of +20% on the year. Economic growth is going to get very close to 3% for the full year of 2017, and yet the benchmark longer term interest rates determined by the market are unchanged for the year. The yield on the 10 year Treasury is 2.43% this morning (ticking UP today). We came into the year at 2.43%.
Again, this is the flattening yield curve we discussed last week. For a world that is constantly looking for the next potential danger or signal for doom, the flattening of the yield curve has been the latest place they’ve been hanging their hats (as what they believe to be a predictor of recession). But those people seem happy to assume this yield curve indicator is driven by the same behaviors that have led to recessions in past economic periods, ignoring the unprecedented and coordinated global central bank manipulation that has gotten us here and continues to warp the interest rate market.
So now we have the Fed, which has been moving away from emergency policies. The ECB has signaled an end to QE next year. And the Bank of Japan is next in line — it’s a matter of when.
So how do things look going into this week’s meeting? We know the architect of Japan’s economic reform plan, Prime Minister Shinzo Abe, has just followed the American fiscal stimulus movement with a corporate tax cut of his own, but only for companies that will start raising wages for their employees. He said today that Japan is no longer in a state of deflation. The head of the Bank of Japan has said the economy is in “very good shape.” And that they would consider what is the best level of rate targets to align with changes n the economy, prices and financial conditions. The recent Tankan survey showed sentiment in the manufacturing community hitting decade and multi-decade highs.
But inflation continues to undershoot in Japan, as it is in the U.S. Japan is targeting a 2% inflation rate and is running at just 0.8% annualized.
So it’s unlikely that they will give any signal of taking the foot off of the gas this week. But that signal is probably not far off — maybe in January, after U.S. tax cuts are in effect. What does that mean? It means our market rates probably make an aggressive move higher early next year (10s in the mid 3s and rates on consumer loans probably jump 150 to 200 basis points higher).
Join our Billionaire’s Portfolio today to get your portfolio in line with the most influential investors in the world, and hear more of my actionable political, economic and market analysis. Click here to learn more.
Last week we had the merger of Fox and Disney, and the repeal of the Net Neutrality rule. And the tax bill continues to inch toward the finish line.
That said, this would typically be the time of year when markets go quiet as money managers close the books on the year, decision makers at companies go on holiday and politicians do the same.
But that wasn’t the case last year, as President-elect Trump was holding meetings in Trump towers and telegraphing policy changes. And it may not be the case this year, as the tax plan may be approved before year end. The final votes are said to come next week, and the bill is tracking to be on the President’s desk by Christmas.
With that, and with the lack of market liquidity into the year end, we may get a further melt-up in last trading days of the year.
Yesterday we talked about the other side of the Net Neutrality story that doesn’t get much acknowledgement in the press. In short, the tech giants that have emerged over the past decade, to dominate, have done so because of regulatory favor. This favor has decimated industries and has dangerously consolidated power into the hands of few. The repeal of this rule is turning that regulatory tide.
It looks like the playing field might be leveling. That means a higher cost of doing business may be coming for Silicon Valley, with fewer advantages and more competition from the old-economy brands that have been investing to compete online. That means potentially slower earnings growth for the big internet giants, for those that are making money, and an even more uncertain future for those that aren’t (e.g. Tesla).
With this in mind, at the moment Amazon is valued at twice the size of Walmart. Uber is valued at almost 40 times the size of Hertz. And Tesla, which has lost$2.5 billion over the past five years is valued the same as General Motors, which has made$43billion over the same period.
Next year could be the year these valuation anomalies correct.
Join our Billionaire’s Portfolio today to get your portfolio in line with the most influential investors in the world, and hear more of my actionable political, economic and market analysis. Click here to learn more.
The Fed decided to hike interest rates by another quarter point yesterday. That was fully telegraphed and anticipated by markets. That’s the third rate hike this year, and the fifth in the post-crisis rate hiking cycle.
Still, the yield on the 10-year Treasury note (the benchmark market determined interest rate), moved lower today, not higher — and sits unchanged for the year.
We talked earlier in the week about the biggest central bank event of the month. It wasn’t the Fed, but it will be in Japan next week. Japan’s policy on pegging their 10-year yield at zero has been the anchor on global interest rates.
When they signal a change to that policy, that’s when rates will finally move.
With this divergence between what the Fed is doing (setting rates) and what market rates are doing (market-determined), people have become convinced that the interest rate market is foretelling a recession coming — i.e. short term rates have been rising, while longer term rates have been quiet, if not falling. For example, when the Fed made it’s first rate hike in December of 2015, the 30-year government bond yield was 3%. Today, after five rate hikes on the overnight Fed determined interest rate, the 30-year is just 2.72% (lower, not higher than when the Fed started).
This dynamic has created a flattening yield curve. That gets people’s attention, because historically, when the yield curve has inverted (short term rates rise above long term rates), recession has followed every time since 1950, with one exception in the late 60s.
And it turns out, this “flattening of the yield curve” indicator, historically (and ultimate inversion, when it happens), is typically driven by monetary policy (i.e. rate hikes — check). In these cases, the market anticipates the Fed killing growth and eventually leading rate cuts! They find more certainty and stability in owning longer term bonds (leaving short term bonds pushing those rates up and moving into long term bonds, pushing those rates down — inverting the curve).
The question, is that the case this time? Or is this time different. It’s rarely a good idea in markets to think this time is different than the past. But in this case, following trillions of dollars of central bank intervention and a near implosion in the global economy, it’s probably safe to say that this time is certainly different than past recessions. Though the Fed is in a hiking cycle, rates remain well below long term averages. And, as we know, we have unconventional monetary policies at work in other key areas of the world — stoking liquidity, growth and skewing demand for U.S. Treasuries (which suppresses those long term interest rates).
So the flattening yield curve fears are probably misplaced, especially given big fiscal stimulus is coming. And when Japan moves off of its “zero yield policy,” the U.S. yield curve may steepen more quickly than people think is possible.
Join our Billionaire’s Portfolio today to get your portfolio in line with the most influential investors in the world, and hear more of my actionable political, economic and market analysis. Click here to learn more.
This morning we got a report that smallbusiness optimism hit the second highest level in the 44-year history of the index.
Here’s a look at that history …
optimism
Remember, last year, following the election, this index that measures the outlook from the small business community had the biggest jump since 1980 (as you can see in the chart).
Why were they so excited? For most of them, they had dealt with a decade long crisis in their business, where they had credit lines pulled, demand for their products and services were crushed, healthcare costs were up and their workforce had been slashed. If they survived that storm and were still around, any sign that there could be a radical change coming in the environment was a good sign.
A year ago, with a new administration coming in, half of the smallbusiness owners surveyed, expected the economy to improve. That was the largest agreement of that view in 15 years.
They’ve been right.
Now with an economy that will do close to 3% growth this year, still, about half of small business owners expect the economy to improve further from here.
No surprise, they are more than pleased with the tax cuts coming down the pike. They’ve seen regulatory relief over the past year. And, according the chief economist for the National Federation of Independent Businesses, small business owners see the incoming Fed Chair (Powell) as more favorable toward business (and market determined decisions) than Yellen. And he says, “as long as Congress and the President follow through on tax reform, 2018 is shaping up to be a great year for small business, workers, and the economy.”
This reflects the theme we’ve talked about all year: the importance of fiscal stimulus to bridge the gap between the weak economic recovery that the Fed has manufactured, and a robust sustainable economic recovery necessary to escape the crisis era. This small business survey tends to correlate highly with consumer confidence. Consumer confidence drives consumption. And consumption contributes about two-thirds of GDP. So, by restoring confidence, the stimulative policy actions (and the anticipation of them) has been self-reinforcing.
Join our Billionaire’s Portfolio today to get your portfolio in line with the most influential investors in the world, and hear more of my actionable political, economic and market analysis. Click here to learn more.
We have big central bank meetings this week. Let’s talk about why it matters (or maybe doesn’t).
The Fed, of course, has been leading the way in the move away from global emergency policies.
But they’ve only been able to do so (raising rates and reducing their balance sheet) because major central banks in Europe and Japan have been there to pick up where the Fed left off, subsidizing the global economy (pumping up asset prices and pinning down market interest rates) through massive QE programs.
The QE in Japan and Europe has kept borrowing rates cheap (for consumers, corporates and sovereigns) and kept stocks moving higher (through outright purchases and through backstopping against shock risks, which makes people more confident to take risk).
But now economic conditions are improving in Europe and Japan. And we have fiscal stimulus coming in the U.S., into an economy with solid fundamentals. As we’ve discussed, this sets up for what should be an economic boom period in the U.S. And that will translate into hotter global growth. So the tide has turned.
With that, global interest rates, which have been suppressed by these QE programs, will start moving higher when we get signals from the key players, that an end of QE and zero interest rates is coming. The European Central Bank has already reduced its QE program and set an end date for next September. That makes the Bank of Japan the most important central bank in the world, right now. And that makes the meeting next week at the Bank of Japan the most important central bank event.
Let’s talk a bit more about, why?
Remember, last September, the Bank of Japan revamped it’s massive QE program which gave them the license to do unlimited QE. They announced that they would peg the Japanese 10-year government bond yield at ZERO.
At that time, rates were deeply into negative territory. In that respect, it was actually a removal (a tightening) of monetary stimulus in the near term — the opposite of what the market was hoping for, though few seemed to understand the concept. But the BOJ saw what was coming.
This move gave the BOJ the ability to do unlimited QE, to keep stimulating the economy, even as growth and inflation started moving well in their direction.
Shortly thereafter, the Trump effect sent U.S. yields on a tear higher. That move pulled global interest rates higher too, including Japanese rates. The Japanese 10-year yield above zero, and that triggered the BOJ to become a buyer of as many Japanese Government Bonds as necessary, to push yields back down to zero. As growth and the outlook in Japan and globally have improved, and as the Fed has continued tightening, the upward pressure on rates has continued, which has continued to trigger more and more QE from the BOJ – which only reinforces growth and the outlook.
So we have the BOJ to thank, in a pretty large part, for the sustained improvement in the global economy over the past year.
As for global rates: As long as this policy at the BOJ appears to have no end, we should expect U.S. yields to remain low, despite what the Fed is doing. But when the BOJ signals it may be time to think about the exit doors, global rates will probably take off. We’ll probably see a 10-year yield in the mid three percent area, rather than the low twos. That will likely mean mortgage rates back well above 5%, car loans several percentage points higher, credit card rates higher, etc.
Join our Billionaire’s Portfolio today to get your portfolio in line with the most influential investors in the world, and hear more of my actionable political, economic and market analysis. Click here to learn more.
