Trump’s favorite word in the dictionary is “tariff”. In his view, it just needs a little public relations (PR) help. I don’t know about that. Personally, I’m not a fan of tariffs. Over the long-run, history has shown they do more harm to the economy vs help. Better PR won’t change that. However, in the very near-term (24-36 months) – they can be seen to add jobs and create benefits for the protected industry(s). From that lens, people are mistaken to believe they’re working (as that’s what’s visible). But what about the unseen? To help explain, I’ll draw on the timeless work of Adam Smith. The protectionist policies of today are not only reminiscent of those in the seventeenth and eighteenth centuries — but are arguably worse in their complexity and scale.
The Big Tech Unwind
Can the market let the air out of the bubble without consequence? The answer relates to my post on economic cycles. That is, panics and busts only occur after booms and bubbles. But what a minute – are you saying this is a bubble? My answer to that is look at where we are in relation to the long-term mean. That’s your litmus test. For example, if we simply take the S&P 500 – it trades at ~22x forward earnings (on the assumption earnings growth this year is 12%). The 10-year average forward PE for the S&P 500 is ~18x (mostly as a function of long-term yields trading near zero). And the 100-year forward PE average is closer to 15.5x. And if we look at tech specifically – valuations are even more extreme.
Wall Street Cheer a “Strong Jobs” Report… Should They?
Wall St. cheered a perceived ‘strong’ monthly June jobs report. The economy added 206K jobs last month – however the unemployment rate moved to 4.1% – its highest level in 2 years. Here’s the thing: there was a lot of weakness in the labor market – with most of the jobs coming from government. In addition, April’s job gains were revised lower by 111K. And May was revised lower by almost 60K. I think there is material underlying weakness (reflected in slower Real GDP and PCE) and perhaps enough for the Fed to start cutting rates in September or November.
What Does Kolanovic See That Others Don’t?
Most analyst year-end S&P 500 targets range from 4200 to 5600 for equities; and 3.00% to 4.75% for 10-year yields. My guess is we will land somewhere in between these zones. On the whole, it’s fair to suggest Wall Street feels ‘comfortable’ with holding equities. Consensus year end targets average 5400 – which tells me most don’t expect stocks to do much between now and year’s end. More important – they don’t expect stocks to lose any ground. This post expands what I think is the single most important variable (and risk) with these forecasts: the relative health of the US consumer and their ability to continue spending.
For a full list of posts from 2017…