Tuesday, March 7, 2017






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


No comments: