Paulsen's Perspective
Profits Please?
Geo-political conflicts, an oil crisis, impeachment drama, and an upcoming presidential election are all currently rattling the stock market. Yet, what really matters for stocks this year is profits. For the stock market to make sustained progress in 2020, companies’ bottom-line performance needs to show renewed life.
Super Cycles
Including those who are bullish for this year, few expect stocks to continue delivering superior returns during the next decade. The economic expansion and bull market are simply too long in the tooth, and valuations too extended, to produce another decade of solid results.
2020 Outlook?
Uncharted Waters! That is the overwhelming impression entering a new year in the midst of the longest economic expansion and bull market in U.S. history! After all, every day is now another record performance as investors are forced to travel where no man or women has gone before.
A Profits POP?
Economic reports have improved in recent months. In the U.S., job creation has remained healthy, consumer and business confidence measures have improved, housing activity has surged, and the Markit Manufacturing PMI survey has risen in three of the last four months.
A New Bull Market?
The S&P 500 did not suffer a bear market last year. At least not by the conventional definition of a 20% decline. However, it was razor close—dropping 19.8% from its highest- to lowest-daily close. Given that, in every way except for -0.2%, the U.S. stock market did suffer a Bear last year, how does its 2019 rally compare thus far to the average “Bull Market Rally?”
Maybe Valuations Are Reasonable?
Since the early 1990s, with only a brief exception at the worst of the 2008-09 bear market, the U.S. stock market valuation has been considered “high” to “ridiculously high.” This is illustrated in Chart 1, which shows the Shiller CAPE Price/Earnings (P/E) multiple since 1900.
Small Biz Feeling Better About Profits?
The November NFIB Small Business Optimism Index rose by a healthy amount this morning. Among the 800 small companies surveyed, there were solid gains across an array of different business trends.
What’s Wrong With LOW Yields?
Are incredibly low yields a signal of imminent peril and a clarion call for caution? Or, alternatively, could they represent an amazing investment opportunity?
A New Recession Gauge
Tomorrow is another “Payroll Friday” and, after a disappointing ADP employment report yesterday, Wall Street will be watching for any indication that businesses are pulling back on job creation.
Unused Capacity?
Based on the calendar, both the economic recovery and bull market are the oldest in U.S. history. Other measures also support this view: 1) the unemployment rate is below 4%, suggesting the job market is at full employment; 2) compared to long-term benchmarks, both the U.S. stock market and bond market are richly priced; 3) several global bond yields are negative; 4) central bank balance sheets have been abnormally expanded; and, 5) the current U.S. federal deficit (as a percent of GDP) is one of the largest non-recessionary deficits of the post-war era.
Cyclical Stocks?
True to their name, cyclical stocks are volatile. They are not to be used in big doses, they are not for the faint of heart, and they are not to be “bought and held!” The overall stock market and therefore most portfolios are exposed to some cyclicality. The question is always, “how much?” While it is admittedly challenging, well-timed tilts away or toward some cyclical sectors can add handsomely to total portfolio performance.
Discounted Destiny?
The dividend discount model is a popular, conventional method of valuing a stock using the present value of its future dividend payments. The two major components comprising this valuation approach are earnings (from which dividends are paid) and the bond yield (or discount rate used to determine the present value of the future dividend stream).
Powell’s PRESSURE?
After a tumultuous year trying to ignore the president of the United States’ constant public criticism, Federal Reserve Chairman Powell reported during his testimony yesterday, “Monetary Policy is in a good place!”
If The U.S. Succeeds… Buy Foreign!
President Trump is focused on improving “fair” trade. He has renegotiated several U.S. trade agreements aimed at making U.S. producers more competitive, reducing significant U.S. trade deficits, and ensuring the U.S. dollar is priced appropriately.
A "Dollar Downer?"
Although it has been essentially flat since early 2015, dollar strength in 2019, in combination with a slowdown in the global recovery, has been particularly hurtful for the U.S. economy.
We Need Some Manufacturing Momentum!
Tomorrow is the monthly jobs report. It’s always widely anticipated since it frequently moves the financial markets. Moreover, it concludes a week that has been filled with potential blockbuster events, including significant earnings reports, ongoing official trade-war commentary, a Fed decision, the elimination of an ISIS leader, and a formal Congressional presidential impeachment inquiry.
Cyclical Scarcity
Scarcity is a good attribute for an investment. A limited supply tends to curb downside risk and fuel upside price potential once the asset is in vogue. In the stock market, scarcity is often associated with a temporary restriction (e.g., an oil crisis) or with a company possessing a monopoly of an innovative must-have product. For an investor, a scarce asset that becomes popular when most don’t own it is a beautiful thing!
A Crescendo Of FEAR… And… CHANGE Afoot?
Despite a significant stock market rally, this year has been beset by escalating recession fears. The list of worries include broad-based slowing in the global economic recovery (centered in the manufacturing sector), a never-ending trade war, persistent political and geo-political drama, a chronic decline in global bond yields, a surge in negative yielding bonds, an inversion in the U.S. yield curve, and an expansion that recently celebrated a birthday which makes it the oldest ever in U.S. history!
Too Much Courage Or Fear?
The underlying character of the financial markets is often a good indication of investor sentiment. It takes courage (or stupidity in retrospect?) to buy certain assets, while the purchase of other investments is driven mostly by fear. In this fashion, a good read on whether the stock market is being propelled by excessive hope or angst can be obtained by monitoring the character of its leadership.
A “Mini-FANGs” Swap?
Despite a slowdown in old-era business investment (manufacturing) during the last year, new-era business spending (information processing equipment and intellectual products) remains healthy. This argues for continued leadership among technology stocks.
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