Last quarter we wrote, “The market itself is a leading indicator. The simple fact that it is doing well now may foreshadow better times ahead.” That said, we stay focused on the underlying fundamentals which remain constructive. What has come to be known as the Trump Bounce is the belief that the markets strong move since the election is primarily due to expectations of a significant reduction in restrictive regulation and tax reform both which would be pro-growth. Though that may very well be the case, we would argue that the underlying fundamentals of earnings, interest rates and liquidity also continue to drive the bull market. The combination of economic policy and strong fundamentals could be a powerful combination.
Earnings reported for the first quarter have generally been stronger than expected. About 77% of the S&P 500 companies to report have beaten analyst expectations versus about 62% last quarter. Earnings growth estimates for 1Q2017 versus 1Q2016 and for calendar year 2017 versus 2016 are up significantly. Corporate profits are rising, interest rates remain low and, there is plenty of liquidity to feed the bull. Much of the liquidity will likely be the methodical exit from the bond market in anticipation of higher interest rates. Some argue that the market is overvalued on a historical basis; however, we believe that earnings growth and the potential economic acceleration due to expected regulatory and tax reform justifies current price levels.
In a recent interview, Alan Greenspan was again asked about his famous 1996 irrational exuberance speech. Two quotes from the interview were quite revealing. First he said “Glad I didn’t sell.” The bull market in that era continued for about another four years. He also said investors should “Buy stocks and forget that you own them.” Like the bull market at that time, we believe there is a lot more upside. Bull markets die once they enter the euphoric stage and a period of excess. That is far from the case now. Though corrections are inevitable, we do not see anything on the horizon that could derail the overall trend.
We still see a “bid” under the market meaning that there seems to be a pent up demand for stocks. Therefore, we will not try to trade any expected correction. We perceive that any correction will be relatively short and shallow and patience will later be rewarded. The last high for the S&P 500 was March 1st. Since then, we view it as positive that market gains have been consolidated within a fairly narrow range. Even though the financial sector finally saw significant profit taking, the S&P 500 was never off the highs more than about 3.25%.
Taking a big picture approach and with our focus on the constructive market fundaments, we remain bullish intermediate to longer term. Subscribe to the Latest News section of our website for mid-quarter market updates and commentary.