AFA Blog

AFA $$$ Blog --- Hold Onto Your Hat......

"The ratio of upgrades to downgrades for U.S. large caps (corporate earnings) stands at the highest level since the data series started in 1988."

  • Richard Turnill, Blackrock Global Chief Investment Strategist

"Based on current earnings and upward revisions on the heels of the U.S. corporate tax cuts from 35% down to 21%, we are forecasting 28,500 on the Dow and 3100 for the S&P 500 by year end 2018."

  • Brian Wesbury, Chief Economist, First Trust

"Many an optimist has become rich -- simply by buying out a pessimist."

  • Laurence J. Peter, Maxims of Wall Street

As we've pointed out in this space many times, the main driver behind the stock market is corporate earnings. Those projections just increased from 12% to anywhere between 16-18% for 2018 from a number of major players - including the three quotes above from three conservative, well-respected players.

The S&P 500 is currently trading at a P/E of 17, which means investors are paying an average of 17 times for the earnings corporations are making. The long-term average for the past 90 years is a P/E of 15.1. Given those current numbers, are U.S. stocks over-valued, fairly-valued or still under-valued?

We would argue stocks are still undervalued with more room to run higher if the earnings estimates for 2018 are even half as good as forecast right now. Earnings per share growth has increased 131% since the market bottomed on March 9, 2009. U.S. companies are in great shape and flush with cash.

The Fed funds interest rate is currently at 1.50%. This is the rate the Fed charges banks to borrow the money they lend to us - the public. Additionally, the Fed has $2 Trillion in excess reserves. U.S. bank balance sheets are the strongest they've ever been - better than they were before the Great Recession of 2008-2009. The Fed could raise interest rates four (4) times this year and the Fed fund rates would still only be at 2.50%.

Thus, the Fed - under new chairman Jerome Powell -- would have to raise interest rates another four times in 2019 or eight times from today - all the way up to 3.5% from 1.5% -- before we would reach a point where the next recession - and normal business cycle -- would start flashing warnings. Even then, it historically has taken another six (6) months for a recession to kick in. We are still a good distance from that scenario - given all current factors affecting both the U.S. and global economy.

{Side Note: This may sound simplistic or even counter-intuitive, but what is one major reason the Fed needs to raise interest rates? To have the power to lower them again the next time we need that tool to help stimulate the economy & come out of the next recession - which is likely still down the road - maybe two years or more. No one really knows.}

If the U.S. economy is growing at 3% or better, this means the yield curve would still look good (positive) - or not inverted - which has been the signal/precursor for the last fourteen (14) recessions of the past 100 years.

Regardless of all the negative media rhetoric, both on TV and from the various publications following the market correction of the last few weeks -- the numbers and real data paint a far different picture of where the stock market could end up for 2018.

It doesn't matter how much you like or dislike President Trump (we get it), he continues to take positive action that affects business, the U.S. economy and the stock market - all of which are doing better -- not worse. But the media stirs the pot as much as possible because Trump's antics, tweets and brash personality sells newspapers and more ads.

And it simply doesn't matter which party is in the White House or Congress when you cut taxes, slash regulations, have full employment, low inflation, and historically low interest rates. If the current trend in the jobs number continues, the unemployment rate in the U.S. could drop to 3.5% -- which would be the lowest since 1960 - before the Vietnam War.

Does deregulation matter? You bet it does. The Federal Register is where all U.S. government regulations are required to be published. They reached an all-time high under President Obama with 97,000 pages. In just the last 15 months Trump has lowered that number to 60,000 pages - over 35% lower.

Over-regulation and bigger government is a major reason the U.S. economy (annual GDP) never grew more than 2% during President Obama's entire eight years in office. A new sheriff in town is making a difference - despite occasional obscured vision with all that hair blowing around when he steps off Air Force One.

Slashing the U.S. corporate tax rate to 21% helps everyone, not just the wealthy or corporate America. Why? Because in reality, U.S. corporate taxes are not paid by the piece of paper that sets up a corporation. They are paid by the shareholders, employees and consumers.

Lower taxes naturally translate into higher dividends, more spending on capital equipment, new factories, higher wages, share buy-backs and mergers. Who benefits from those actions? Investors/shareholders, employees and consumers.

Steel and aluminum tariffs (25% & 10% respectively). Are they Good or Bad? Will this start a trade war? The trend of the past 75 years has been to lower and/or eliminate tariffs around the world. What is our "crazed President" up to this time? Our guess is he's "negotiating" -- while setting a precedent by putting the rest of our trade partners on notice to make it more-fair for all of us - or else. Human nature is at work here.

My view on a smaller scale? The guy or gal that goes into the car dealer, has done their homework, has cash/leverage and is the most unpredictable - gets the best deal.

Will it lead to an all-out trade war? Maybe - but not probable. As we said, Trump is "negotiating". We're also in the middle of re-negotiating NAFTA (North American Free Trade Agreement). He's sending a message to our neighbors - to be fair - or we will use the hammer we own. The rest of the world needs our business. Trump also said he's willing to re-enter talks on the Pacific trade agreements. Crazy?? - yeah maybe - like a fox.

Our take? If you're the leader of a country right now, would you rather be on Trump's good side or bad side? Let Trump be Trump and do what his ego thrives on - the art of the deal.

The announcement yesterday that the leader of North Korea --Kim Jong-un (since 2011) wants to talk with President Trump is proof -- strength comes from power. It's been a while since America has exercised the respect we have earned - while providing aid, guidance, military support & billions of dollars to other nations.

Bottom line: There are numerous reasons to remain bullish on America. Our next blog/discussion will focus on the rate of change being brought to all of us by technology, innovation, creativity, entrepreneurial spirits and pure American ingenuity. This too is having a dramatic effect on our economic output and stock market.

A sincere "thank you" for taking the time to read this article. Pass it on to a family member, friend, or fellow investor. More to follow.

Respectfully, Mike Stark

P.S. If you have any questions or comments, please call us at 770-977-2434 or 888-413-9080 or e-mail your thoughts anytime. As always, we value your trust in our services and look forward to continued growth in 2018.

As always, we sincerely appreciate your trust in our guidance,

Linda, Pat, Mike, Kevin, Andria, Pau

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