Don’t Conflate Politics with Economics
The equity market has been trading within a fairly narrow range for the past few months and now sits a mere 5 percentage points below its all-time high in late January. Uncertainty is high as to whether the market will resume its ascent, or the rally will peter out. (In truth, uncertainty is always high about where the market might go.) Partly, this is because people’s attention is easily diverted by politics, both domestic and international, even as the economy remains on a solid trajectory. We expect economic growth to continue, which is likely to enable stocks to resume their advance, even as we fully expect political issues to remain front and center in the news.
The list of major political issues in the news is lengthy, including the Mueller investigation, trade talks with our NAFTA partners, trade talks with China, tariffs imposed on assorted trading partners, nuclear disarmament negotiations with North Korea, termination of the agreement with Iran to restart disarmament negotiations, the ongoing conflict in Syria, a new populist (and probably incompetent) government to assume power in Italy, and plenty of others. Each one of these has the potential to remain front and center and capture our attention for many months or longer into the future. While any of these might possibly be disruptive to our economy, at least to some degree, that’s all conjectural, since none of them needs play out badly. And many can fester for years without any real economic damage.
While our attention is diverted frequently by new developments on each of the listed political fronts (and more), economic conditions remain very positive. The economy is plowing ahead at a solid pace and corporate profits are rising vigorously. First quarter profit reports were dramatically better than projected and analysts are still timidly revising upward their earnings estimates for 2018 and 2019. And while some pundits claim the market’s price earnings multiple is exceedingly high by looking backwards, forward multiple projections have declined sharply, since stocks have treaded water over the past four months even as actual earnings have surged more than expected. The current P/E based on 2019 earnings is now just 15.5 based on Friday’s close, below the average P/E over the past 50 years.
Looking back at the past seventy plus years since World War II, significant domestic and international conflicts and issues have been commonplace. Nonetheless, economic growth has been a strong driver of household standards of living, corporate profits, and stock market values. The recent rise in Treasury interest rates is a reflection of the economy’s strong growth. Until that economic growth falters, any retrenchment in stock prices is likely to prove ephemeral, even with undesirable geopolitical developments. Most importantly, there is a dearth of adverse disruptions on the economic front. Don’t confuse the typical global geopolitical turmoil with the healthy performance of the global or domestic economy.
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