Economic Insights - January 2017

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Economic Insights - January 2017 LoadingADD TO FAVORITES

In the six weeks following our publisher’s November 6th message to Strategic Wealth Advisor subscribers urging them to prepare for the impending Trump victory, the S&P 500 rose 9.25 percent and the Dow rose to 20,000 for the first time. 

This “Trump Rally” has many detractors, just like the entire 2009-2016 bull market, which pushed up stocks more than 200 percent.  Just as we heard the past eight years, we are hearing it again: “the market has moved too far, too fast.” 

This rally, they say is based on nothing more than “Hope and Faith.”  After all, nothing has changed yet.  It’s all wishful thinking.

However, we totally disagree.  According to our capitalized profits model, the market was undervalued by roughly 30 percent on election day.  In fact, it was undervalued for the previous eight years, as well.

We believe the reason it was undervalued was because government policy was constantly making it more difficult for free markets to operate.  Higher taxes, higher spending and more regulation increase the risks to future growth.  That’s why the slow-but-steady economy persisted even after a “roaring boom” should have emerged.  At the very least, these policies are now halted; at best, they will soon be dramatically reversed.

Furthermore, profits are already rebounding.  It’s true that in the years 2014-2016, the drop in oil prices undercut profits, not just for energy companies, but for ancillary businesses like trucking, machinery, and materials.  As a result, once profits hit an all-time record high in the fourth quarter of 2014, they fell.  Now, oil prices are stabilizing, which has helped economy-wide corporate profits rise 6.6 percent in the third quarter.  After that, profits now stand just 2.8 percent short of that previous record high.

So, instead of asking why the market is up, investors should be asking why wasn’t it rising more previously?  After all, with profits turning the corner in an already undervalued state, the market should be up.

But it was hard for stocks to rise with such a bad set of fiscal policies.  And, until two months ago most experts expected these to continue for four more years.  But, following the surprising election...

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