Market Pulse: A word
No, not the “R” word that’s increasingly in the news. Now it’s the “G” word, G as in gridlock. Gridlock in Washington is when neither party controls all three — the house, senate and the White House. That’s where we will be starting Jan. 3.
Stock investors look forward to gridlock because little of consequence will get done and prices will reflect what matters most, i.e. earnings and interest rates. As I wrote a month ago, stocks are historically strong after mid-term elections. There’s more. In Decembers past the Dow has risen 71% of the time and the S&P 500 73%. The Nasdaq and Russell rose more often than not as well.
Still, stock investors have a lot on their plate. What price in terms of the P-E ratio should they pay for growth? What level for more secure stocks such as utilities, consumer staples, energy producers and banks? There is no one right answer to that other than “it depends.” There will be conditions ahead — some foreseen, some not — that will power earnings growth and stock prices. For much of the past 10 years expanding price-earnings ratios accounted for half the market’s rise. That was then. Earnings growth must be the driver now.
The direction of inflation will play a key role in the earnings and interest rate picture. Inflation data will fall because the CPI measures the rate of change in prices more than their level. Gasoline prices may have doubled in the last year but they are very unlikely to double again next year and double again the following year. People would drive less, complain more; demand would fall. The CPI can fall even if prices don’t.
Then there are bonds. This has been the worst year ever for bonds. Symbol TLT holds long-term Treasury bonds (20 years plus). It is down 27% this year.
The S&P 500 is up 8% from last June and has risen despite all of the negatives including the growing prospects for a recession next year. That puzzles some people including many in the investment business who focus only on the here and now and current data. One word explains it and it’s not gridlock. It’s anticipation. Forget the obvious negatives. Those are all known and today’s prices reflect them. The bulls are anticipating better days ahead. As Mr. Buffett wrote after the 2008 financial crisis, “if you wait for the robins, spring will be over.” Indeed.
David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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