All posts by Howard R. Gold

Complacency, Thy Name Is Trump

 

When you’re President Donald Trump and you snap your fingers, the courts and the media don’t stand at attention.

But when you tell Wall Street to jump, the answer always is: “How high”?

On Thursday, the U.S. Court of Appeals for the Ninth Circuit upheld a lower court’s stay on the administration’s controversial travel ban on people from seven mostly Muslim countries that have a history of sponsoring or spawning terrorism.  The legal fight may go to the U.S. Supreme Court.

And despite chief White House strategist Stephen K. Bannon’s admonition to the media to “keep its mouth shut and just listen for a while,” news organizations like The Washington Post and The New York Times have published story after story about internal battles in the administration, extensive leaks, and apparent conflicts of interest in the Trump family.

But when the president floated the vague notion that within the next few weeks, he would unveil a “phenomenal” tax plan,  yet provided no details, all three major market indexes achieved new all-time highs.

Like Trump supporters during the campaign, Wall Street has focused on all the positive things the administration may do (tax cuts, deregulation, infrastructure building) while ignoring everything else (possible tariffs, trade wars, etc.)

Is it missing the forest for the trees?

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Two Boosts for the Trump Market

 

The January jobs report had good news for the Trump Administration and the market, though its surveys were taken before Inauguration Day.

The U.S. economy added 227,000 new jobs in January, the best monthly jobs report since last June. Unemployment ticked up to 4.8%, but the labor force participation rate also rose slightly as more people looked for work.

The one down side was that hourly earnings rose by a mere 0.1% in January and only 2.5% during the past 12 months. That’s more than the 2% annual growth they’ve shown over the last few years but weaker than the 2.9% trend that had the Federal Open Market Committee (FOMC) on track to raise the federal funds rate three times this year.

The FOMC held its ground at this week’s meeting and the low wage increases and weak GDP growth of 1.6% in 2016 have Wall Street believing the Fed might raise rates even more slowly.

That was one reason the Dow Jones Industrial Average was up by about 170 points Friday afternoon, while the Standard & Poor’s 500 index was within a few points of the 2,300 mark and its all-time high.

But there was another reason stocks closed the week with a bang.

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Is Dow 20,000 No Big Deal?

 

Another big milestone and the naysayers are out in force.

When markets hit big, round numbers, technicians usually say, “never mind.”

But this time some intellectual heavyweights are, well, weighing in on the Dow Jones Industrial Average reaching the 20,000 benchmark.

Nobel laureate Robert Shiller of Yale, Mr. “Irrational Exuberance,” concedes in The Guardian that Dow 20,000 “will still have a psychological impact on the markets.”

But he calls it a “powerful illusion,” because the Dow is up only 19% in real (inflation-adjusted) terms since 2000, a gain over 17 years he calls “underwhelming.”

And Zachary Karabell writes in Foreign Policy, “The positive economic trajectory that underpinned the rise of liberalism and democracy…is clearly shifting into a lower gear—despite the recent good news from Wall Street.”

What are we to make of this?

First of all, Shiller has one more Nobel Prize than I do, and I have great respect for Karabell as a writer and thinker.

But Shiller’s famed CAPE index, which measures the market’s price vs. earnings over the last ten years, has indicated equities were overvalued in 416 of the last 422 months, according to no less a figure than Jeremy Siegel of the Wharton School.

And how does a market milestone like Dow 20,000 trigger in Karabell a bout of pessimism and weltschmerz worthy of the great German historian Oswald Spengler, he of The Decline of the West fame?

Actually, Dow 20,000 is a mere pretext for Karabell’s ruminations on the limits to growth, a meme some of us remember from the controversial Club of Rome report back in the 1970s.

And underlying much of the commentary—explicitly in Shiller’s case—is the unwillingness to attribute the market’s recent gains to the election of Donald Trump.

We will never know if there would have been a similar relief rally if Hillary Clinton had won the Electoral College as well as the popular vote, three to five million “fraudulent” voters notwithstanding.

But as I wrote here last week, the Dow and Standard & Poor’s 500 index rose more than 150% under President Obama. And as of Thursday, the indices had gained 9% since Election Day, accounting for some 1,600 Dow points.

Those gains will be illusory if Trump’s promises of more infrastructure spending and lower corporate taxes are washed away by trade wars with China and Mexico.

But already strong consumer sentiment has improved since the election and business confidence has soared. That could spur growth and improve corporate earnings, which, along with interest rates, really drive stocks.

Love him or hate him (there’s little in between), the Trump rally is for real, and should continue. At least in this area, we have to give the devil his due.

 

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It’s Trump’s Market Now

 

At around noon Friday, Donald J. Trump took the oath of office and became the 45th President of the United States. Despite much anxiety among people who didn’t vote for him, the world didn’t end and the stock market didn’t crash.

Yet those who expected the new president to reach out to his defeated opponents with conciliatory words and olive branches were disappointed.

President Trump’s inaugural address was bellicose and unyielding, explicitly advocating “protection” and “America first,” in a call to arms against Democrats and Washington Republicans alike. It echoed the dark vision of a country under siege (“American carnage,” he called it) that marked his acceptance speech at the Republican National Convention in Cleveland.

Perhaps reflecting that, stocks sold off from their highs earlier in the day. But who really knows why the stock market moves on any given day? What we do know is that from this day on, President Trump “owns” the economy and the stock market and, fairly or not, his popularity will ride on it.

So, what are his chances?

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Earnings Won’t Wait for Trump

 

Next week at this time, Donald J, Trump will have been inaugurated as the 45th President of the United States. But the markets aren’t waiting.

The so-called Trump rally has stalled, as the Dow Jones Industrial Average, which seemed poised to top 20,000, now finds it hard to surmount the 19,000 barrier, let alone the magic round milestone number.

The Standard & Poor’s 500 index is holding up a little better, around 2,273, while the Nasdaq Composite Index, at about 5,573, is just short of its all-time high as technology, which lagged in the Trump rally, has quietly gained ground.

I think that tells us something particularly important about the market as earnings season begins.

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Can Trump Take the Economy Higher?

 

Except for the fourth-quarter GDP report, which won’t be finalized until the end of March, Friday’s jobs report closed the books on the Obama economy.

The U.S. economy added 156,000 net new jobs in December, the Bureau of Labor Statistics reported. That was less than forecasters projected, but it marked the 75th consecutive month of job growth, the longest on record.

It wasn’t exactly the most robust growth—since October 2010, job growth has averaged about 200,000 a month, and that pace slowed last year to 180,000—but it’s been steady. Since early 2010, businesses have added 15.8 million jobs, including 2.2 million last year and 2.9 million in 2015.

On the other hand, workforce participation remains near historic lows, for many reasons I don’t have the space to go into here. And voluntary part-time workers have picked up in the past couple of months and are up 600,000 for the year, although that increase exactly cancels out the decrease in the number of people who work part-time but want to work full time.

But the really good news, which is most likely to impact the economy, the Federal Reserve, and stock and bond markets, occurred on the wage front.

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Closing in on Dow 20,000

It’s six weeks and counting for the Trump rally, and though things slowed a bit this week, there’s no sign it’s winding down.

On Friday the Dow Jones Industrial Average closed at 19,844. It marked the sixth consecutive weekly advance and puts the Dow less than 1% from the “magic” 20,000 level. Who would have thought that was possible during the financial crisis, when the Dow bottomed below 6,600 and some gurus and pundits thought it had nowhere to go but down?

Meanwhile the Standard & Poor’s 500 index, the Nasdaq Composite index, and  the Russell 2000 small-cap index were all down on the week after having hit all-time highs the previous week. China’s seizure of a U.S. underwater drone in the South China Sea rattled investors in the afternoon.

That aside, investors appear convinced President-Elect Donald Trump’s plans to cut taxes on businesses and individuals (especially wealthy individuals), slash regulations, and spend a boatload of money on infrastructure will spur growth in the economy and corporate profits.

Will it happen or is the market getting ahead of itself?

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Stocks Are Off to the Races

 

Finally! This is what a real bull market feels like.

Stocks have been hitting new highs on most days. On Wednesday the Dow Jones Industrial Average shot up almost 300 points. On Thursday, the Dow, the Standard & Poor’s 500 index, the Nasdaq Composite index, the Russell 2000 small-cap index, and the Dow Jones Transportation Average all hit record highs.  The Dow is within 1.5% of the magic number of 20,000.

Whether you call it the post-election rally or the Trump rally, it’s happening. Just as consumers are becoming more optimistic about the economy (consumer sentiment readings reflect that, and the National Retail Federation expects shoppers to spend about 4% more on gifts this holiday season), investors have become more bullish on stocks as well.

The flip side of bullishness on stocks is bearishness on bonds, and the ten-year Treasury note sold off again on Friday. Its yield is now 2.47%, more than a full percentage point above its all-time low of 1.37% in July.  That reflects a huge drop in bond prices.

Bond investors clearly are looking for faster economic growth and higher rates ahead, so they’re selling bonds and buying stocks.

So, is this a relief rally now that the election is over? Or is it a Trump rally? And what’s next?

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The Economy Is the Real Deal

 

4.6% unemployment? Who woulda thunk it?

Sorry, folks, the old New Yawk accent slips in from time to time. But Friday’s November jobs report capped a series of strong data releases over the past week that show the economy is doing well and on the way to doing even better.

On Friday morning, the Labor Department reported the U.S. economy added 178,000 net new jobs last month (156,000 of them were in the private sector), which was about in line with economists’ projections and well ahead of October’s revised 142,000 new jobs. In 2016, the economy has been creating on average 180,000 jobs a month, down roughly 20% from last year but still pretty good.

The big headline news, though, was the 4.6% unemployment rate, lowest since August 2007. And the rate for adult men fell to 4.3%. Some of the sharp decline in unemployment is because discouraged workers have stopped looking for jobs, and as the naysayers are quick to point out, workforce participation remains low.

Which is true, but there are several reasons for it I don’t have the space  to explore more deeply here. Suffice to say, the jobs report shows an economy where the glass in three-quarters full—and getting even more full.

Here’s more proof of that:

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Subscriber Alert: Big Changes to Our Investing Plans

 

Last  week, all four major indices—the Dow Jones Industrial Average, the Standard & Poor’s 500 index, the Nasdaq Composite index and the Russell 2000—hit record highs on the same day for the first time since December 31, 1999.
We all know what happened after that. But I think this post-election rally may reflect a fundamental realignment rather than an impending market peak.

We’ve seen gains across a broad spectrum of stocks, and the particular power of the financial stocks, which are still way below their 2007 bubble peak, is especially notable. Meanwhile, the dollar is hitting 13-year highs and bonds have been hit hard.

As I wrote in MarketWatch, Wall Street is looking for the incoming Trump Administration and Republican Congress to cut taxes on businesses and individuals, repatriate cash companies are storing abroad, and even approve the kind of massive infrastructure spending they resisted under President Obama.

Keynesian infrastructure building may be a tough sell in Congress, but the tax cuts alone, along with the evisceration of Dodd-Frank and removal of restrictions to drilling imposed by President Obama, would probably be a boon to the markets. It would make higher inflation and more interest rate hikes more likely and the threat of recession –at least in the U.S.—more remote.

The only real threat to the markets now, in my view, is the situation in Europe where Italian banks remain shaky and France could land the third blow for populism (after Brexit and Donald Trump) if the National Front’s Marine Le Pen is elected president next May, leading to the unraveling of the EU and the euro. That only strengthens the case for U.S. stocks and certain U.S. bonds.

So, we have made the following changes to most of the GoldenEgg Investing® retirement investing plans:

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