Solid Market Fundamentals Trump Unstable President

What’s Up On Wall Street, 1st Quarter 2017
(written April 2017)

As the first quarter drew to a close, most stock markets had moved higher while bonds overall recovered from a poor prior quarter and nished up as well. Over the quarter the stocks of large U.S. companies rose by 6.1%, U.S. small companies nished This is a continuation of higher by 2.5%, foreign stocks were up 7.2% what was already happening and bonds, broadly measured, rose by 0.7%.

Both the financial and general press were dominated by news out of Washington D.C. as the new President’s term got underway. While action in the capitol does affect the broader economy, the economic and business earnings outlook will normally have more impact on stock market results. Presidents have long received too much credit—or blame for economic conditions on their watch. Still, it is understandable why the markets and media are xated on Washington. The news never seems to stop and it’s increasingly wacky. It feels like rubbernecking on the highway as we pass an accident; it’s hard to look away.

However, the long-term movement of stock prices tends to be more in uenced by interest rates and business earnings. As the stock market has continued to rise since the election, some economists now believe that the rally is more about positive economic data that supports the picture of a normalizing U.S. economy. This is a continuation of what was already happening during the second term of the Obama administration.

Speaking of interest rates, Federal Reserve Board (the Fed) did in fact raise interest rates in mid-March, for the second time in three months. Interest rates were cut dramatically during the financial crisis in an effort to stimulate the economy, and have been well below normal ever since. So, rising rates are seen as a needed return to economic normalcy. The Fed will attempt to keep rates from rising too rapidly, which could slow the economy or even tip it into a recession.

The stock market rally has continued mostly unabated since the bottom back in March of 2009. Justifying higher market values will require solid economic results going forward. If reported company earnings remain strong and the Fed does not raise rates too aggressively, then the pace of the rally may slow, but the direction could still be higher. We should note that the market slumps in 2015 and early 2016 were triggered not by domestic events, but by concerns of a slowdown in China. Unexpected global disruptions are always lurking around the corner with potentially damaging effects.

Also in March, the President signed an executive order to begin rolling back the Obama Clean Power Plan, the former President’s signature climate change policy. Among other things, the order rescinds a ban on new coal leases on federal lands. While the action may give a reprieve to some coal-fired plants facing closure, large utilities say they will continue long-term investments to generate more power from gas, wind, and solar, policies which are being driven by economic as well as regulatory forces. The White House itself said that the order was part of Trump’s promise to restore the coal sector, but acknowledged that merely rescinding the regulations wouldn’t bring jobs back.

Finally, while the Fed is primarily charged with maintaining full employment and keeping in ation at bay, Fed Chair Janet Yellen will at times comment on a variety of economy-related topics. In a recent Fed study on the well being of ordinary Americans she said, “Considerable evidence shows that growing up poor makes it harder to succeed as an adult.” While this may seem like common sense, partisan economists and others have maintained that American society is in fact a level playing eld and that ”personal responsibility” is the antidote for any sort of hardship one may have experienced during childhood.

While the study has not been released yet, the Chair gave a glimpse of the findings, saying that adults who grew up worrying about food, an unstable family, or personal safety were less likely to be employed, have stable income or be able to pay monthly bills, as compared to adults who had better circumstances growing up. Yellen used the findings to underscore the importance of good education in low-income areas as well as job training and skills development. “Ensuring that all of our kids have strong foundations will help build a similarly strong foundation for the U.S. economy,” Yellen said. The study is due out later this year.

This article first appeared in the Spring 2017 edition of the Natural Investment News.

Scott Secrest

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