It seems that there is just no end to the euphoria that is fanning the flames of the equity markets. There are several explanations that seem to rationalize this phenomenon, but at the end of the day, they all seem to be explanations which are more conjecture than meaningful theory. Sometime long ago, I came to understand that the markets look mainly to just three fundamentals, …Interest Rates, Earnings, and Inflation, that’s it. If that is the case, then it would seem that the stars are perfectly aligned. The proof is in the pudding. For years we have had the lowest of inflation, and interest rates, and recently, companies have been showing very favorable earnings, of course being greatly aided by the falling US dollar. So far the Federal Reserve has continued to be a great friend resulting in the buoyancy of markets.
Most every article I read tends to indicate that the equity markets have reached the stratosphere, and that there is no further room before a tailspin does bring them down. And yet, this holds to be so far from the truth, every time you go to press the sell button. The current PE ratio stands at an estimated 25.38 and at the time of my last post in May of this year, it was at 24. The Dow Jones Index stands at 22745 today whereas it was at 20994 at the time of my last writing. At that time, I did think that the chances of a decrement were higher than any further uptick, but like most of the crowd I was off by a fair margin.
The North Korea bluster on both sides continues, the border tax has been dropped (surprise surprise), Britain struggles with its Brexit strategy and seems to have tied itself in knots, and of course Merkel, who seems to have taken over the baton of leadership of the western world has been voted in for a fourth time, has her work cut out for her. The replacement of Obamacare, ACA whatever, your choice of the day is, seems to have been relegated to the trash can of history, although don’t be surprised if there is a move to resurrect it. I believe attempts were made to do away with social security for 10 years after it was introduced. Has anyone heard as to where the massive infrastructure plan is headed? Talks of trade wars and border walls seem to have been stymied. I hope they too go the way of the Border Wall that is...nowhere. Phew.
So where are we headed? Well we have a new tax law in the offing which is to cut taxes dramatically based on this illusory concept of “dynamic scoring” which is projecting future government increments in revenue anticipating the growth in the economy, brought about by those very decrease in taxes….and then doing a quick Hail Mary hoping that things work out the way they were intended to. This has always struck me to be odd. We, as individuals, would be not very adroit in spending today based on what we are going to earn over the next say five to ten years, but then again government does work in mysterious ways. If this equation does falter, we could see interest and inflation rates rising faster than expected due to even a higher ballooning of the deficit, and at some point, the “R” word recession starting to raise its ugly head. It will be a challenge to have the US economy growing at a 4% to 5% rate in my estimation, if the past has anything to say in the matter.
I started a pool which has a few of my friends taking a guess as to where the Dow Jones Index ends on the last day of each year. We make our entries each New Years Eve. Guess what…yes, as it stands, the Dow has far extended any of these projections. One of my favorite lines of all time is out of Alice in Wonderland....“if you dont know where you are going to, then every place that you do get to, seems to be the right place,”