The stock market has been on quite a run since the presidential election. We’ve seen record highs for the Dow, S&P 500 and the NASDAQ. Recently, the Dow set another new record going over 20,400 for the first time.
Investor sentiment is very bullish right now and stock valuations are high by historical standards. Investor sentiment is typically a contrarian indicator. Investors are the most optimistic when the market is high and the most pessimistic when stocks are down.
When President Obama took office, the market was at a low level; it bottomed in March of 2009. Valuations were cheap and the Fed was cutting interest rates and embarking on a highly stimulating monetary policy known as QE or quantitative easing.
When President Trump started his term, the stock market was at record levels with high valuations and the Fed had recently started raising interest rates.
The economy has been growing, but at a relatively tepid pace. GDP growth has been around 2 percent and will most likely stay close to that level. The job market has been strong with U3 unemployment at 4.8 percent, but the participation rate is low. The U6 unemployment rate is quite a bit higher.
Fourth quarter earnings for stocks have been positive overall. Over 70 percent of S&P companies have reported so far and 67 percent of those have beaten their earnings estimate, according to data from FactSet.
The earnings growth rate for this quarter is running at about 5 percent, which is better than expected, and it looks like the fourth quarter will be the first time the market has had earnings growth in two consecutive quarters — since the last quarter of 2014 and the first quarter of 2015.
People are expecting the Trump administration to be business friendly and the economy to thrive. Some of the changes that have been discussed will take time to implement. Infrastructure spending is supposed to pick up, but infrastructure projects can take a long time to get started.
Some tax reform is anticipated, but we’ll have to wait and see what the final details are. There has been talk of a BAT tax, which is a border adjustment tax that will affect the prices of both imports and exports. If a BAT tax is put in place, it is likely that we’ll see currency adjustments to partially offset the tax consequences.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. For more information, visit his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
