We are just a week away from Thanksgiving and then the holiday season really kicks into high gear. While many headlines warn of overvaluation and Grinch predictions of market pullbacks, Runnymede remains bullish. Since last summer, we have been beating the drum on strong global earnings driving stock markets higher and higher. Nothing has stopped the above trend profit growth and now we are in the strong seasonal part of the year.
This week, Fitch Ratings warned that record junk bond prices combined with risky corporate bond issuance is creating "increasing uncertainty" and is raising the chances of a sharp turnaround in the European high-yield, aka junk bond, credit market. Thanks to massive quantitative easing by the European Central Bank, yields on Euro junk bonds have been dropping steadily since early 2016 when the ECB began buying huge amounts of corporate debt. The most popular benchmark for European junk bonds fell below two percent for the first time ever last week. This is flat out crazy as investors are taking significant risk for just a two percent yield, less than a 5-year US Treasury Note which is considered the safest bond in the world. Fitch warned that recent market calm and the distorting impact of monetary policy "obscure the true risk-return dynamics faced by investors."
President Trump is said to be considering tapping Stanford economist John Taylor as the next Fed Chairman. If Taylor gets the nod, it is possible that the Fed adopts the Taylor rule to set the Fed funds rates. The so-called Taylor rule is a formula that he proposed in 1993 for setting the federal funds rate -- the overnight bank lending rate used by the Fed to fight inflation or stimulate the economy. It challenges the Fed’s traditional reliance on the Federal Open Market Committee’s ad hoc judgment.
Today marks the 30th anniversary of Black Monday where the Dow Jones Industrial Average crashed 23%, the worst one day drop in stock market history. This afternoon, I had lunch with eight money managers that lived through it and they remember it like it was yesterday. One was working at a DLJ trading desk and he said that there were no buyers and as the market fell, their solution was to not pick up the phone. Another stated that it was so horrific that the only thought was to enjoy dinner while their credit cards still worked. They feared that the job losses would be enormous. Then it was my father Sam's turn to speak. He was managing the Bank of New York's pension assets and other institutions like the Dow Jones profit sharing plan. He had seen the writing on the wall in August of 1987. I recall that we were on vacation in Switzerland and he went to the front desk of the hotel to get his valuation runs which were faxed over from New York. Because interest rates were rising quickly, valuations moved from fairly valued to grossly overvalued and he made the critical decision to start selling. In the November 2, 1987 issue of Barron's quoted Sam saying, "I raised about 20% cash in the first two weeks of August. At that point, there were a great number of signs pointing to an imminent bear market... and by the end of August, my institutional accounts already went to 35% cash, and individual accounts went to about 55% cash." His economic model was spot on and not only was it right, but he took decisive action and made the bold call to move to cash when the market was still up over 40% for the year and hitting new highs.
The International Monetary Fund (IMF) raised its global growth forecast for 2017 and 2018 due to a broad-based recovery around the world. In its latest World Economic Outlook, the IMF adjusted their forecast up 0.1 percentage point to 3.6 percent in 2017 and 3.7 percent in 2018.
US consumer confidence rose for the 4th straight month and posted its second highest reading in the last 16 years. The Conference Board said its consumer confidence index increased to a reading of 122.9 in August which was above expectations. US consumers remain upbeat thanks to the strong stock market, rising real estate prices and a tight labor market. Consumers have thus far shaken off the news of violence in Charlottesville and the increasing tensions between North Korea and the US. While war is always a risk to markets, we believe that cooler heads will prevail. Tougher sanctions will likely be the next step against North Korea unless they do something really crazy. Keep in mind that North Korea is so puny that it is almost laughable. It is like boxer Floyd Merriweather showing up to your house for a fight. For comparison, in one day, the US makes up over 2x the size of North Korea's annual GDP.
Since last summer, I have written several blog posts on positive earnings from the S&P 500 constituents. We view accelerating earnings growth as a key driver of stock prices moving forward. Schwab's Chief Global Investment Strategist Jeffrey Kleintop just wrote a very compelling post called "Earnings may be about to do something they've never done before." Thanks to global growth picking up across virtually all regions, global earnings (measured by the MSCI All Country World Index) are expected to reach new heights in the near future. This is also bullish for the S&P 500 which generates roughly 44% of its revenues from outside the US.
The S&P 500 is roughly halfway through earnings season with 237 companies having reported. It has been a very strong period so far with 79% of companies beating expectations vs an average 73% over the last 10 years. Earnings are on track for double-digit growth once again and this should be a bullish catalyst for the market in the second half of the year. As we discussed in our last quarterly webcast for clients, reported earnings continue to accelerate and we view this as extremely positive for the stock market. Here is the chart from our call:
The International Monetary Fund (IMF) has revised its China's GDP growth forecast for 2017 and 2018 to 6.7% and 6.4% respectively. This is up from an upgrade made in April to 6.6% and 6.2%. China's growth is expected to continue to be a key driver for a firming recovery of the global economy.
I remember visiting Vegas as a teenager. My family stayed at the Excalibur Hotel and there was a lot of entertainment for kids with arcades and kid friendly games. We waited in line for the $1.99 steak buffet dinners. Parking was always free. Fast forward to 2017 and that Vegas is long gone and today's Vegas is much more flashy and expensive. The cheap buffets have been replaced by celebrity chefs like Bobby Flay, Mario Batali and Thomas Keller. You can easily drop $50 just on lunch. Maybe I haven't looked very hard but I don't see any video arcades anymore. It is now all grown up entertainment from magicians to Celine Dion to Britney Spears to Jerry Seinfeld. And lots of people walking around with giant alcoholic beverages. This is the first time that I was hit with a mandatory $35 resort fee for wifi and not sure what else. And even free parking is gone. The casinos finally figured out that they could be collecting millions of dollars instead of giving it away - kind of feels like how the airlines charge for every little thing and it adds up fast.
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