It’s Monday morning April 2. In the wee hours as well as during the weekend our president delivers another blistering tweet storm trashing Congressional lack of action on DACA (Deferred Action for Childhood Arrivals), threatening to blow up NAFTA (the North American Free Trade Agreement) if Mexico doesn’t get tougher on border security from their side of the border. Again, his wrath targets the alleged state-sales-tax-dodger and US postal service victimizer* Amazon (AMZN), Jeff Bezos and the Washington Post.
It may have been a pretty frustrating week in the office, what with the continuing probe by a dogged special prosecutor or possibly it was inflamed by a less-than-stellar round of golf at Mar-a-Lago. It’s hard to play good golf when your mind is somewhere else. The heat in the White House kitchen would appear to be way up. Harry Truman is credited with the sayings “if you can’t stand the heat, get out of the kitchen” and “the buck stops here.” Neither would be apropos to a traditional response for our president. Instead, he passes the buck and deflects to divert attention from the real issues troubling the country or new legal/ethical revelations about members of his administration. The general effect of these deflections has been to hurt equity prices. These tactics work to continually sow uncertainty and keep the market off balance. And, as we said last week you can expect more of the same in the weeks and months ahead (Trade Wars, Fed Tightening and The Fine Art of Deflection, Yikes). My advice: Get used to this and the volatility it inspires.
Is the bark worse than the bite?
In the case of President Trump his bark is probably worse in part because there seems be little or no deep knowledge on the the part of the president about that of which he is speaking. Secondly, I believe, much of what he says is done to distract and to to divert, not to articulate a strongly-held policy belief. Either way it is negative for stock prices and it is going to be with us until the Congress, the electorate or the courts move to rein him in. Or, when Investors come to take these pronouncements for what they are … deflections.
Lest we forget the whole market got crushed in the first quarter (perspective)
Well, not really. In fact since the first of the year the Dow Industrials, S&P 500 and Nasdaq have turned in the following performance stats respectively — -2.9%, -1.22% and +2.32 (the tech-heavy Nasdaq composite). These numbers would hardly indicate a rout. In fact Jim Paulsen, chief investment strategist Minneapolis based Luethold Group, opines we might need more of a shock/correction to prepare the bull market for another run to new all-time highs, “Why a Bigger Dose of Market Panic Could Help.” This article about Paulsen may yet be another attempt by Jeff Sommer in the Strategies column of this Sunday’s New York Times to save us from investing in the stock market. He has been doing this as long as I have been writing this blog (over 5 years). Check this out from spring 2013 “Dow 15,000 and The Big Disconnect — Wall Street’s Giddiness vs. Main Street’s Pain.”
One of Paulsen’s negative arguments has to do with perceived HIGH Valuations. According Thomson Reuters I/B/E/S at the S&P 500s’ April 2, 2018 close of 2581.88, the PE on trailing 4 quarter earnings of 132.96 is 19.5 times. Using a forward 4 quarter estimate of 158.06 (remember, this includes the effect of the tax cut) the PE drops to 16.4 times. The current dividend yield is 1.95% ($50.44 on a $2588.00 index). This compares to a 1% yield at the top of the tech bubble, March 2000 or $15.50 on a $1550 index. For a point of reference the 10-year treasury in March of 2000 was yielding 6%+. It went out 4/2/2018 at 2.732%. If you buy that bond today there will never be an increase in interest for as long as you own it. Meanwhile, the yield on the S&P has tripled over the last 18 years with the principal up 67%.
What I can agree on is Paulsen’s contention that you might have a chance to buy stocks at lower prices especially if the confusing distractions, the early morning tweet barrages, continue to emanate from the White House. Ironically, the president may be unwittingly doing damage to one of his favorite boasts, the strong stock market that has existed since his election … just when you thought it might be safe …
What’s your take?
*Fake News –Many states have agreements with AMZN to collect sales tax. Fast rising package delivery volumes (some from AMZN) at the postal service help offset losses from decreasing volumes of snail-mail.
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