The US and global stock markets continue to reach market highs. The US expansion is now in its eighth year. At the beginning of the first quarter market analysts were fixated on the next policy moves of the Trump administration. In anticipation of a more favorable business climate (e.g. Deregulation, lower taxes) stocks jumped higher. At the beginning of the quarter there was considerable uncertainty as to how the incoming president’s campaign rhetoric would be translated into policy and how these policies would affect stock performance. After a quarter in Trump’s presidency, the picture is much clearer. Health care reform efforts have failed. Tax policy reform looks like a long shot. Radical changes that President elect Trump campaigned on, are either being rethought or softened as political realities settle in. This realignment of thinking has not been bad for the stock market. US stocks are up 5.8% for the year and 18% since March of 2016. The good news is not limited to the US. Global economies continue to recover. Emerging market growth was up 11.4% for the year and 17% over the past year.
On a technical level, the growth in US stocks is being supported by growth in corporate profits. For the fourth quarter of 2016, after tax profits jumped 22% over the previous year, while profits as a percent of GDP climbed from 7.8% to 9.2%. Moreover, corporate profits are projected to grow by 22% in the first quarter of 2017. Although interest rates are rising along with inflation, the Federal Reserve so far has shown caution in increasing interest rate. In March the Fed increased the federal fund rate by a ¼ of a percent – the third time since the Recession of 2008. Although a couple more ¼ percent hikes are anticipated in 2017, these modest increases are unlikely to have much impact on either on the economy or stock valuations.
When is this party going to end? In the short term it is not too hard to imagine US stocks continuing to increase along with profits, developed non US economies rebounding as the world economy recovers, and emerging market stocks growing as a result of stable commodity prices and favorable stock evaluations. Under this rosy scenario no major policy or world event shocks occur. In the longer term, however, it is s harder to envision how this upward surge continues. US and world inflation is on the uptick. As the US nears full employment, employer costs will continue to rise putting a squeeze on profits. Productivity, a major driver of long term economic wealth, has been trending downward. Government debt and entitlement spending are growing at unsustainable levels.
The best way to prepare for the inevitable downturn is to stay focused on achieving your long-term goals. CMP can help you develop and maintain adherence to your goals despite the ups and downs of the stock market. Remember that our retirement projections assume and expects periodic market downturns. We believe helping you deal with uncertainty is just as important as managing your investments. We look forward to working with you to achieve a better future.
