Market Pulse: Incongruities will all become clear
I’ve mentioned before that sometimes things just don’t add up in the financial markets. I was referring to data and prices that belie the consensus feelings about the outlook for economic growth and interest rates, which together determine stock prices. Those incongruities are still with us.
First, interest rates. The major banks will report lower second quarter results compared to a year ago, and have already said as much. Their stocks, leaders after the election, have reversed course and are now down year-to-date. Perhaps the certainty that lending margins will widen as rates move higher was not quite that certain after all. In fact, longer-term rates are declining.
The direction of interest rates and dividend yields says a lot about the economic outlook. If growth is to pick up and with it demands for credit, there would be upward pressure on interest rates.
But just the opposite is happening. Utility stocks, thought by many to be proxies for interest rate expectations, are near all-time highs. Preferred stocks are near or at their highs, same for exchange-traded debt. What’s that all about?
Perhaps it’s not so complicated. Here we are in June and there are congressional vacations ahead, one next up in August. If there is to be a tax cut (never mind reform) this year, Congress had better get cracking.
Without tax cuts, both corporate and personal, Gross Domestic Product (GDP) growth prospects would suffer a setback. Of course, so would stocks. At the same time, investors who believe that some of the Trump agenda can be implemented this year remain optimistic for the economy and for stocks.
One needn’t be entirely in one camp or the other, and we’re not. Several of my holdings are closely tied to the economy and faster GDP growth (Nasdaq 100 ETF and Emerging Market ETFs), while many are not (utilities, healthcare, telecoms). Then there are the income vehicles — preferreds, exchange-traded debt, BDCs, etc.
The incongruities will all become clear in time. Profit growth will continue to exceed nominal GDP growth (4-5 percent). Interest rates will rise, though not by much.
Such an environment bodes well for stock investors even after the market’s long run. Bull markets don’t die of old age. They die ahead of a recession, one caused by excesses we do not see today.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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