Monday, January 22, 2018

Continuing to Melt Up...

Monday, January 22, 2018 - Upward momentum continued to drive US Equity Markets which set new more highs last week with the S&P 500 and NASDAQ Composite closing at 2,810.30 and 7,336.38 respectively for a weekly gain of .86% and 1.04%. More impressively, the indexes are up YTD 5.11% and 6.27% respectively.

All of this occurred despite concerns about another Federal Government Shutdown due to political gridlock and partisanship in Washington – which has now occurred. Investors shrugged off any concerns that the shutdown would slow down economic growth. Indeed a look at prior shutdowns shows that they had little to no effect on the economy’s trajectory.

Another significant event for investors to watch this week will be the news coming out of the World Economic Forum in Davos. While the mood at this year’s Forum is likely to be upbeat – or at least more upbeat than the past few years due to the unexpected synchronization of global economic growth, not withstanding this year’s rather ominous theme “Creating a Shared Future in a Fractured World”.

Trump is expected to deliver an address to the gathering on Friday. The significance of this cannot be underestimated as this is the first visit by a POTUS since Bill Clinton. Along with Trump, a significant entourage of high ranking US officials will be accompanying the him which begs the question if a major policy initiative will be delivered or will he deliver a populist lecture on the need to Make America Great Again and America First policies. We would wager on the former as Trump’s actual actions and family business interests seem to be more in line with these “Internationalists”.

The main themes of the conference sessions are: the deteriorating geopolitical landscape, growing income disparity, cyber-threats and environmental degradation. The last topic not being a revered topic for this Administration.

Picking up on last week’s discussion, we believe the odds favor US equity markets continuing to trend upwards. Why?  First, let’s keep in mind that the sudden acceleration of the economy has caught a lot of observers off guard, so there is still a healthy dose of skepticism out there. Economic growth continues to accelerate worldwide and that is good news for businesses, workers and investor profits.  Evidence of the pickup in economic activity can be seen in the rapid recovery of spot oil prices which are now approaching $70 (Brent). This is a far cry from the depressed prices some 18 months ago.  High prices furthermore encourage more exploration and recovery in US energy sector in general. The move in oil prices has come from increased buyer demand – which is evidence of increased economic activity, not supply constraints which generally foreshadow inflation.

Secondly, let’s consider the effects of the fiscal stimulus of the corporate tax cuts. The new found money in corporate coffers will find its way either to Shareholders in the form of increased dividends and stock buybacks, to employees in the form of wage increases and one time bonuses (ie Walmart, VISA, Apple), business expansion and R&D, and lastly and most importantly (in the short term) for investors, M&A. We expect to see repatriated cash particularly for the tech industry and old line industries to go into acquiring competitors and digital businesses. Additionally, one cannot underestimate the economic stimulus from relaxed regulation particularly on small to mid-sized businesses. Excess regulation acts as a friction on the economy as it does not generally add tangible value to GNP.  To date, the Trump Administration has significantly rolled back many Obama-era executive orders.

Major research firms are starting to recognize this new paradigm. For example Howard Silverblatt at S&P just released his earnings forecast for 2018. He revised 2017 earnings down by a few dollars to $110 as S&P analysts realized that companies are going to have to take write-downs for their deferred tax losses. However, he sees earnings growing from $110 to $138 in 2018. The $28 jump in earnings represents about 25% earnings growth.  If it actually materializes, look for the bull market to race on. A national infrastructure package would be icing on the cake. Hence we favor Ed Hyman’s observation that we could very well be in a “Melt Up”.

If indeed if we are in a Super Bull Market, investors should be prepared to buy on any pullbacks but keep a cautious eye on interest rates. Europe, having lagged in recovery compared to the US offers some good opportunities for investors as European companies restructure. Investors could enjoy not only upward valuations in equities but ride the current upward swing in the value of the Euro vs the USD.

These trends show that research tools like our Select List and Risk and Reward Ratings are increasing needed to evaluate the vast set of opportunities in the ETF marketplace. Investing in ETFs requires a new approach to macro investing, one in which investors are just beginning to realize.

Investors and traders are advised to check the ETFG Select List and the ETFG Daily Quant Movers to gain insights into the latest news developments.

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