Tuesday 7th March 2017
A dose of reality in the face of new records….
It is one milestone after another for the US stock-market. The early months of the Trump era will be recalled as a golden time for financial headline writers.
No sooner had the Dow punched through 20,000 for the first time, but another pinnacle was conquered last Wednesday – the index shooting up straight and true through 21,000.
The rise represented the joint-fastest transit through 1000 points in the entire history of the Index. It took just 24 trading days. This bull market – the second-longest since 1928 – has a firecracker attached to its backside.
And there’s no shortage of hot-air in the tanks to keep the big balloon inflated as it floats ever closer to the moon. Much of this helium has been generated by President Trump….
It was his election to office late last year that drove a stock-market rally and pushed major indexes to a string of new record highs….
And it was his comments last week in his first address to Congress that produced sufficient lift for the Dow to crash through the 21,000 mark….
- Long on syrupy nonsense – short on detail….
In truth, Trump has struggled to appear Presidential. Last week was an opportunity to demonstrate that he’s growing into his new shoes.
It was also an opportunity to apply some much-needed paint to his outline vision for America – the vision that got him elected….
He certainly sounded Presidential – but only insomuch as he said little that could be clearly understood, easily pinned-down or readily translated into hard policy….
His speech was long on syrupy nonsense that played to US-centric sensibilities. But it was pitifully short on detail. It was a case of one ‘happy-clappy’ slogan uncomfortably bolted to the next and then coated in sugar….
‘I am asking all members of Congress to join me in dreaming big and bold…. I’m asking everyone watching…. to seize this moment, believe in yourselves, believe in your future, and believe once more in America….’
‘From now on America will be empowered by our aspirations, not burdened by our fears. Inspired by the future, not bound by failures of the past, and guided by a vision, not blinded by our doubts….’
‘The time for small thinking is over…. We just need the courage to share the dreams that fill our hearts… and the confidence to turn those hopes and those dreams into action….’
A new national pride is sweeping across our nation. And a new surge of optimism is placing impossible dreams firmly within our grasp. What we are witnessing today is a renewal of the American spirit.’
Only politicians get license to talk this way – as though they are away with the fairies or toiling under the influence of strong medication.
Try expressing these same sentiments next time you’re in a big meeting at work. See how far you get before someone challenges you to focus and get real….
- Making America great again?
I haven’t got a clue what any of Trump’s statements mean once you get their feet back on the flat earth.
There was no mention of what the shared vision, belief or aspiration of the American people is exactly (assuming such a collective thing exists).
There was no mention of how such a vision will be pursued. Or how we might measure progress in that specific direction. Or how the American people will know when their vision is realized….
It was just political evangelism – a triumph of style over substance. Mere words – stripped of real meaning and standing-in for action.
In-between times Trump did say (again) that he intends to boost the US economy with a ‘massive’ tax relief programme; a $1 trillion spend on infrastructure; and a complete overhaul of the Obamacare programme.
But he was merely reeling-off an already-established Christmas list – with no additional detail indicating how the financial ends will be made to meet….
Lewis Alexander, Chief Economist at Nomura, summed up: ‘We did not learn much that would influence our economic outlook.’
The market lapped it up nevertheless….
- Onwards and upwards….
The stock market pushed on. Onwards and upwards. If you judge the strength of the US economy on stock-values, things have never been better.
President Trump speaks. The markets rise. Trump is making America great again.
All it takes, it seems, are words. And even the words don’t need to mean anything much. Just use the ones people most want to hear.
This is an exciting brand of economics. One breaking all records. Chances are it will keep on working the magic – at least until it stops working.
Despite recent events in US markets, that time might come sooner than you think. A correction is overdue. The bear market is a-coming….
- A dose of reality….
The Dow and the S&P 500 have been growing like weeds….
Since the start of the current bull market back in March 2009, the S&P 500 has grown somewhere close to 250% – dividend payments not included.
The index has risen more than 6% since New Year’s Day – and almost 20% in the last 12-months.
But here’s the rub. The profits of the companies that comprise the S&P 500 index have gone down – for each of the last five quarters. Profits are lower now than 4-years-ago.
In other words, the value of the S&P 500 companies is increasing (as stock prices rise) at a time when profits are falling across the board….
In a normal world, you might expect the value of a company (as reflected in stock price) to be directly linked to the profits its commercial activities produce. How else should a company be judged if not by profitability?
As a company grows profit and becomes more valuable to a shareholder, its stock price increases. If profits fall, so too its stock price. That would be a general expectation. But that’s not what we’re seeing right now.
- A disconnect at work….
The US market continues to set new records. Its individual companies are increasing in value all the time. The bull market continues to run and run. Investors – especially those that have been in the market for a few years – sit on a pile of gains and expect more still.
But all the time big companies are producing less and less profit. There’s a clear disconnect between the results corporations are reporting and the value of those corporations as measured by the stock-market.
Maybe we are witnessing the birth of a new era – one where the stocks values can rise and rise again regardless of falling revenues and diminishing profits in the companies that underpin them.
After all Snap Inc was initially valued at $33 billion when taken to market last week – despite the company never actually earning a single penny in profit….
Or maybe we are witnessing a situation where results and value are only temporarily disconnected….
Investors want to believe there are more gains to come. They are being encouraged in their belief by the words of a man who appears to have it in his power to deliver.
Maybe he can. Maybe he can’t. We will find out down the line.
But when the belief evaporates, so too will the current disconnect between results and value. Then the market will correct. Then the bull will turn into a bear.
That’s how it looks from here….
I’ll be back with more next Tuesday morning.
All the best,