“Good investors gather information, put that information into current and historical context, then make sound decisions.”
When I Googled ‘The Top Five Questions’ I got 1.81 billion results in 0.63 seconds. Seriously. I could go on about that relative absurdity for quite a while, but won’t. The short take is that the first five pages are about job interviews. Unemployment is historically low and the job market is tight. Makes sense. Then it starts to deviate into what to ask various doctors, Uber drivers, and God. In that order. We live in interesting times. The top five questions that I have been getting lately are far more direct.
Why are stock markets going up? Stock markets are going up because corporate earnings are going up because productivity is going up. The real kicker for the stock market was the decrease in corporate tax rates, from 35% to 21%. Since the tax rate cuts, which took effect this year, wages have increased, and unemployment has declined. It’s a win/win because two thirds of the U.S. economy is represented by consumer spending. This also put U.S. corporations in a very competitive global position. Before the reduction they had one of the highest corporate tax rates in the world.
Why have stock markets been rising so slowly? We are in one of the longest lasting Bull Markets in history. It follows one of the worst Bear Markets and economic recessions in history. The recovery has been taking so long because of steps taken by the Federal Reserve and the Federal Government after that Bear Market. The Federal Reserve decided to hold short term interest rates near zero, then entered into ‘Quantitative Easing’ measures designed to assist the banking sector. Meanwhile, the Federal Government ballooned in size with the aid of record Executive orders and bureaucratic expansion. This became a burden on the economy, because the federal government does not contribute to productivity. The result was a slow recovery and a slow stock market.
When is this Bull Market going to end? The quick answer is that we have never had a Bear Market without an accompanying economic recession. An economic recession is defined by two consecutive calendar quarters of negative GDP, gross domestic product. We haven’t even had one such quarter. If fact, the first two quarters of 2018 showed continuing expansion and growth. This type of growth doesn’t turn on a dime. In fact, leading economists project it to continue well into 2019, perhaps even into 2020. So we keep an eye on the horizon, but the reality is that trouble does appear to be quite a ways off.
How about those trade wars? The news media loves drama, specifically drama which aims at the White House, thus coining ‘trade wars.’ Almost all of the major trading nations in the world impose trade tariffs, including the U.S. The current administration is seeking to equalize tariffs. Why? Because some of our trade partners are ‘big boys’ now and don’t need that advantage any longer. Here are the average tariff rates for the U.S. and its ten largest trading partners: S. Korea, 13.9%; Brazil, 13.5%; India, 13.4%; China, 9.9%; Vietnam, 9.6%; Mexico, 7.0%; Malaysia, 5.8%; EU, 5.2%; Canada, 4.1%; Japan, 4.0%; U.S., 3.5%. The bullseye is on China, which has grown to be the world’s second largest economy. So far, everyone but Canada wants to negotiate.
What about the potential impact of the mid-term elections? Once again, this is a plaything of the news media, which will inject far more drama than substance into the process, and the results. Currently Congress is in virtual gridlock because the Democrats have no majority and the Republicans don’t know what to do with their majority. The result is a recurrence of Congressional inaction and a flood of Executive actions. The drama has also been extended to the Judicial Branch, which has become a surrogate decisive body in light of the relative ineffectiveness of the Legislative body. Financial markets happen to favor gridlock, because the rules remain the same, right, wrong, or indifferent. The impact of the mid-terms should be minimal.
Edward D. Foy, Manager, SELECTOR® Money Management.
Sources: Bloomberg.com, Marketwatch.com, StockCharts.com.