What a way to start 2017. Donald Trump in the White House, the Dow breaks 20,000, and the Falcons are going to the Super Bowl. That’s a lot of change to start the year.
But any number of things remain unchanged in this crazy new world. We all love Julio Jones, mac and cheese is a staple in any household with kids under 10, and stocks still make sense in your investment portfolio.
Yes, the stock market is hovering near a record high, with the Dow having eclipsed 20,000. And, yes, the first months of a new president’s term often wreak havoc with share prices, as the markets grapple with two things they hate — the unknown and uncertainty. The market typically loses about 4 percent of its value in the February following a new POTUS’s swearing-in.
Despite those realities, there are plenty of reasons to believe stocks can stay strong in 2017. Here are just some of the reasons:
The bull lives. Long-term bull market cycles, also known as secular bull markets, typically last about 17 years. According to the Ned Davis Research Group, we are less than eight years into a secular bull cycle. Recessions can and do happen during a secular bull cycle. But in the eight times that’s happened, the recession did not end the market’s upward trend.
Valuations are still in-line. Valuations are still not in the “bubble zone.” The level of the stock market itself is less important than the actual level of earnings from its underlying companies. A simple valuation metric is the S&P 500’s price to earnings ratio, and currently we are only slightly above historical norms; and this number could moderate significantly if we get earnings growth in 2017. Similarly, people are not overinvested in stocks. The ratio of stocks/bonds as a percentage of household assets is well below the levels seen at the peak of previous secular bull cycles.
Earnings remain strong. Aggregate earnings for the S&P 500 are nearly $120 over the past year. Third quarter 2016 earnings for the S&P 500 rose 3 percent, the biggest gain in profits we’ve seen in the past two years. More importantly, earnings are expected to grow close to 10 percent over the next year.
Rising interest rates. A rise in interest rates, like we’re currently experiencing, historically pushes stock prices higher until the rate gets to about 4 percent on the 10-year Treasury. This is where the cost of borrowing can become a drag on economic growth. We’re currently at 2.5 percent on the 10-year, so rates are still in the safe zone.
The economy grades at a B+. Many economic indicators remain firm. Job growth continues. Wage growth at 2.9 percent is helping fuel consumer spending without posing a threat of inflation. Housing still looks solid with prudent lending, low supply and high builder confidence. In addition, small-business optimism about the economy is at a 12-year high, and consumer confidence is at a 13 year-high.
Trumponomics. If President Donald Trump succeeds in lowering the corporate tax rate to 15 percent or 20 percent, the move could increase S&P 500 earnings per share by 7 percent to 14 percent. His plan to allow U.S. companies to repatriate foreign cash could add another 1 percent or 2 percent to earnings. The new president’s continued effort to dramatically roll back federal regulation on business and industry could also boost corporate earnings and prompt expansion.
If not stocks, then what? Of course, there are plenty of places to invest around the globe. Bonds, real estate, commodities, and even just parking money in cash. Using history as a guide, stocks currently present the best value relative to these alternatives. Commodities are firmly in the midst of a long-term bear market, and headwinds for the bond market appear to be picking up.
So, even in this rapidly evolving world, stocks are still a pretty good deal compared to our other investment options. They won’t necessarily travel in a straight line upward. There will almost certainly be rough patches along the way. But can we grind higher over the next year? I think the answer to that is yes.
Read the original AJC article here.
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