Eight
March
7, 2017
Eight:
What a difference eight years makes! It was eight years ago today, on Monday,
March 9, 2009, that the Dow Jones Industrial Average hit bottom, closing at
6547. The S&P 500 closed that day at
676. Last Friday, these indices closed
at 21,005 and 2383 respectively, each up by a multiple of more than three in
the last eight years.
Many prognosticators spill lots of ink, attempting to divine
the direction of the market, most of them with little success. The challenge seems to be that the market
doesn’t correlate well with any specific external indicator.
Some would think that economic policy has an impact on the
market, yet studies show the market is agnostic to which political party
controls the White House and Congress.
Other factors are sentiment, interest rates, and earnings.
If sentiment were the only indicator, it seems we would be
more than halfway to the top of the current bull market. Sir John Templeton, the country boy from
Tennessee who built his career investing outside the U.S., said that “Bull
markets are born on pessimism, grow on skepticism, mature on optimism, and die
on euphoria.” I’ll agree with my friend
Jim, who said the current sentiment seems to be somewhere between skepticism
and optimism.
Interest rates are low to the extent that orphans, widows,
and pensioners can earn nothing on debt.
Therefore, many in this group have invested in the stock market, with a
special emphasis on dividend paying stocks.
This has pushed the price/earnings, or P/E ratio of the S&P 500 to
26.75, and the P/E of the DJIA to 21.45, compared to historical averages for
these indices of about 15.
Finally, many companies over the last several years have
built outsize cash reserves, as there was material uncertainty about the state
of government regulation, and its impact on business. This defensive approach to business led to
earnings that were likely lower than they could otherwise have been, if those
reserves had instead been invested to grow revenue. Currently, expectations of promises delivered
around a lower corporate tax structure, as well as regulatory and healthcare
reform, have fueled stock prices over the last four months.
What’s next? We don’t
know. The future isn’t given to us, and
is at best a promise. We can say with
certainty that at some point we will experience another bear market, defined as
a drop in stock prices of 20% or more.
We don’t know the timing of that bear market.
Over the last eight years, we have had ten pullbacks of 5%
or more, with five of those being in correction territory, defined as a 10%
drop. We could have several of these before
a bear market sets in, and according to Deutsche Bank, the stock market has a
correction of 10% or more every 357 days.
In the meantime, favorable interest rates, sentiment, and the
expectation of corporate earnings continue to drive the stock market.
On the economic front, GDP growth for Q4 2016 was positive,
up 1.86%, though that was half the rate of the 3rd quarter. Consumer spending remained strong in Q4, up
2.05%, while the nation’s savings rate stood at 5.6%. Real disposable income was revised upward for
Q4, to +2%.
Last Friday, Janet Yellen, head of the FOMC, seemed to
indicate that the Fed had done just about all it could do to stimulate growth,
while holding firm on inflation. Further
progress, she seemed to suggest, would need to come from fiscal policy changes
– taxes and regulation – rather than further monetary policy actions.
Quote of the week:
“The glory of a workman, still more of a master workman,
that he does his work well, ought to be his most precious possession; like the
honor of a soldier, dearer to him than life.”
Thomas Carlyle
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