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.
If you look at the headlines on a daily basis, you are often left wondering when the market is going to crash. However we are pondering a different question. Are we just at the beginning of a long secular bull market? We believe that it is a distinct possibility. When I graduated from college in 1997, the market essentially went sideways for over 11 years. After the Great Recession, the recovery has been slower than usual but the global economy is now rising in tandem. Here is a chart of the secular bulls and bears since 1900 and the pattern is quite easy to read. For our clients, we will go into more detail on this subject on our quarterly conference call. If you are not a client and are interested in tuning in, please ping email@example.com for the details.
This week Warren Buffett made headlines by predicting the Dow Jones Industrial Average will surpass one million in 100 years. Given that the Dow is at 22359 at the close of Thursday, one million sounds like a big number however as Buffett said, "The Dow will be over a million and that is not a ridiculous forecast at all if you do the math." I agree 100% and in fact, Buffett is likely conservative in his one million prediction.
Yesterday the rhetoric between the US and North Korea escalated further with President Trump saying the US would "totally destroy North Korea" if forced to defend itself or its allies. He said that while the US "has strength and patience," its options would soon run out. This follows the president's comments from August 9th when he said "North Korea best not make any more threats to the United States. They will be met with fire and fury like the world has never seen ... he has been very threatening beyond a normal state. They will be met with fire, fury and frankly power the likes of which this world has never seen before." So far the markets have shrugged it all off, but can Kim Jong-un sink this long running bull market?
Yesterday the S&P 500 closed at a record high so it is unsurprising that you see headlines asking if the market is overvalued or is this a bubble? Many pundits are calling this stock market a bubble and predicting doom. In Bank of America Merrill Lynch's August fund manager survey of global investors, a record 46 percent of fund managers said that U.S. stocks are overvalued. In July, Goldman Sachs research highlighted "elevated valuation on almost every metric" in its weekly report on markets.
This weekend, the crazy dictator in North Korea stepped up the insanity by supposedly testing out a hydrogen bomb. Whether they actually did this is debatable but the rhetoric is going beyond words with missiles and bomb tests. What Kim Jon Un is trying to accomplish is anyone's guess because he isn't winning any friends with ballistic missiles over Japan or nuclear tests. We just hope that a strategic miscalculation doesn't lead to a serious war.
As money managers, we have to decipher whether this is good or bad for the stock market. In April, Barron's Mark Hulbert wrote a piece titled "War is Hell - but Not for the Stock Market." Is this true?
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.
As a dedicated reader to our blog, you may have noticed that our blogging pace has slowed this summer much like the stock market. I guess you can say we are both stuck in neutral. Well we are still grinding away but have been busy with conferences and now I am on a much needed holiday to recharge and enjoy some shave ice. Don't worry I will back blogging with more regularity next week. As for the stock market, the sell in May philosophy has worked well again this year. While seasonality doesn't occur exactly the same every year, there definitely are seasonal trends that prevail in the stock market. This year, the S&P 500 has been stuck in a sideways move since June and volatility has picked up a bit as well.
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.
Despite the weekly doomsday headlines (this week is from filmmaker Michael Moore - we do not recommend taking investment advice from fimmakers, ever), Billionaire hedge fund manager David Tepper called comparisons of today's market with the tech bubble of 1999 'ridiculous' and we wholeheartedly agree. Tepper who runs Appaloosa Management says that the market run doesn't translate into over the top valuations in equities.
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