Market Pulse: Still good news
Early last week President Trump said that he and China President Xi will have “extended meetings” at the G-20 gathering in Japan. Stocks rallied on the news.
Then last Wednesday Federal Reserve chief Jerome Powell said that the slowdown in economic growth may justify one or more interest-rate cuts, a fact the credit markets had been reflecting for a few months.
Investors now see a rate cut in July as a certainty with a good likelihood that there will be one or two more before year-end. The yield on the 10-year Treasury quickly fell below 2% and the S&P 500 set a record high.
The S&P is up 16% year-to-date, that despite all that would seemingly undermine it. GDP growth here and overseas is slowing, tariffs and Iran are wildcards, we have a problem on the border, and profit margins are far more likely to shrink than expand or even hold their own. And stocks are setting records?
One reason is that some investors overreacted late last year to potential negatives. Nothing new about that. Falling interest rates are a clear example.
We know the benefits of falling interest rates. They encourage home buying and lower the cost of capital while increasing returns on investments.
They also support higher stock valuations as the present value of future earnings and dividends rises when yields fall. Rates are falling overseas as well.
Now more than $13 trillion of bonds globally trade with negative yields. They are negative in Japan, Germany and now France. Others will soon join that club.
These positive developments, and potentially others, are reasons to be optimistic for the overall market and some better-yielding issues in particular.
Those investors who don’t know what to make of the trade spats and fading economic data have been playing it safe with companies that are out of harm’s way, such as the pipelines and healthcare stocks. Utilities are also good examples. The S&P Utility SPDR (XLU) set all-time highs.
Bottom line: Investors should not be distracted by short-term rallies and sell-offs or by explanations from Wall Street strategists and the media’s explanations for every move.
In the long run, future earnings will determine future stock prices. It’s that simple. What value investors place on future earnings today is always changing. That’s why they open the market every day. Investors seeing the positives are increasingly confident in the future for inflation and earnings, as am I, and willing to pay more today to get on board.
More converts will provide additional fuel and higher prices
David Vomund is an Incline Village-based fee-only money manager. 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 adviser before purchasing any security.