Tahoe Market Pulse: Investors anticipate good things
January 14, 2017
People can debate whether Donald Trump will be good for America, but there is little debate that he will be good for corporate profits.
Taxes will be reduced and regulations will be limited. No wonder stocks are rising. The rising market isn't just a U.S. phenomenon.
Stocks in the U.K. closed last year at an all-time high (plus 14.4 percent in 2016 versus the S&P 500's 10 percent). So much for worries about Brexit's impact on the U.K. economy. Stocks elsewhere have also done well.
Never mind Trump's daily tweets that receive so much coverage and dominate the news, just as he intends. There will be inconsistencies between campaign rhetoric and life in the real world.
That is always the case. President Obama said he would close Guantanamo. George H.W. Bush said "read my lips, no new taxes," then agreed to some.
Whether the business friendly environment justifies higher and higher stock prices is another matter. That will depend on future earnings growth, the outlook for which has improved.
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Earnings in 2018 are now expected to be 18-percent higher than in 2016. A cut in the corporate tax rate will be one reason. A rebound in energy profits is another. Bringing back much of the $2.5 trillion in cash overseas will help, too.
Long-term interest rates have already responded with a move higher in the 10-year Treasury. They are not going far and it's entirely possible that long-term rates will fall again, a prospect virtually no one entertains, but one we're beginning to see now as the 10-year yield falls from a high near 2.70 to 2.37 percent.
Why would rates fall? There could be any number of reasons, including a recession triggered by a trade war or other factors or maybe trouble overseas. Where? Pick a spot. From Libya across the Mideast to Afghanistan there is nothing but conflict and tens of millions of refugees. The boiling pot has spilled over to Europe.
Some analysts say stock prices are "overvalued" or "high." Compared to what? To valuation levels when the outlook for profits was not as positive as it appears now? If other investment choices are unattractive, and they still are, then investors will steadily push prices higher in fits and starts.
That's been true for years now and I don't see it ending anytime soon.
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 adviser before purchasing any security.