It's hard to read the business pages or watch the business news without seeing a story about the death of the consumer. In particular, the business press continues to be obsessed by relative weakness among traditional brick and mortar stores.
For many years now a relatively large contingent of analysts, investors and journalists has been convinced the stock market was in a bubble because the "Shiller P-E" ratio was just too high. Back on 8/12/2013, in our Monday Morning Outlook, we made our case that the Shiller model was too pessimistic. Now that looks like a pretty good call.
Yes, Friday's report of the Q2 real GDP growth rate was a little faster than average, but, with one exception, it remains the same Plow Horse it's been for the past eight years.
The Federal Reserve made no changes to interest rates today and made almost no changes to the text of its statement. However, the wording changes it did make strongly support our view the Fed will announce the start of balance sheet reductions at the end of its next meeting on September 20.
Since the start of the economic recovery in mid-2009, real GDP has grown at an average annual rate of 2.1%. The second quarter of this year doesn't look much different. Our calculations suggest real GDP grew at a 2.5% annual rate in Q2, exactly the same as the consensus forecast.
At eight years, the current economic recovery is the third longest on record. Personal income, consumer spending, household assets, and net worth, are all at record highs. Stock markets are at record highs. Corporate profits are within striking distance of their all-time highs. Federal tax receipts are at record highs.
Remember the weak May payroll report – just 138,000? Didn't think so. But, back then, that first report on May was reported as a massive economic slowdown that should stop the Fed from further rate hikes.
In March 2009, the stock market started its current bull run. At first, it was a V-shaped bounce from the 2008 Panic lows after mark-to-market accounting was changed.
The Federal Reserve just finished its annual round of large bank stress tests. The banks all passed – meaning they had enough capital to withstand a massive financial shock and deep recession.
Last week the Federal Reserve hiked the federal funds rate by ¼ of a percentage point for the fourth time since December 2015. The funds rate is still below the rate of inflation, which means the Fed is still a long way from becoming tight.
The Federal Reserve did what almost everyone expected today, raising the target range for the federal funds rate by 25 basis points to 1.00% - 1.25%.
When the Federal Reserve raises rates by another quarter percentage point on Wednesday, you're going to see many stories about monetary policy getting tight and the potential threat that poses for the economy in general and the bull market in stocks in particular.
With home prices recovering, builders will become more active and housing will follow the path of vehicle sales...with a lag, helped along by too much government.
Now that we're eight years into a bull market, some investors just assume something has to go wrong. As a result, we see lots of stories and get lots of questions about "bubbles," as in "what market or sector is in a bubble already?"
While some investors are freaking out about investigations, tweets, or the personality of President Trump, we are still watching policy.
News of the consumer's death has traveled fast.
We wish we had a dollar for every time we've heard that the bull market in equities is only due to loose money. We have consistently disagreed, arguing that although the Federal Reserve is loose, the bull market is primarily a function of the rebound in profits after the disaster in 2008-09.
The most important part of today's statement from the Federal Reserve is that it thinks the slow economic growth in the first quarter is temporary. As a result, the market consensus on the odds of a rate hike by June rose to about 94% after the meeting from about 67% beforehand.
Economic data is volatile. Weather, seasonal adjustments, calendar flukes, and measurement errors all affect the data. Nonetheless, those with a political axe to grind, or an economic forecast of recession or boom, will grab one piece of data and act as if they have discovered the Holy Grail.
When the French elected François Hollande as President in 2012, the global left rejoiced. Mr. Hollande ran on a platform of protecting workers from capitalism. He wanted to raise the top income tax rate to 75%. Analysts predicted a political turn to the left across Europe, if not beyond.
As we wrote three months ago, it's going to take much more than animal spirits to lift economic growth from the sluggish pace of the past several years. Measures of consumer and business confidence continue to perform much better than before the election.
Last Friday, payroll employment data, from a survey of businesses, showed the US created just 98,000 jobs in March. The consensus of forecasters had expected job growth of 175,000. The other jobs number, which comes from a survey of households, showed 472,000 new jobs in March.
If you read us regularly, and we hope you do, you know that we write each week about a topic we think is both important and timely. Last week, we were either clairvoyant, or extremely persuasive.
Well, that was fun! The GOP's attempt to reform healthcare hit a brick wall of politics. Conservative Republicans wanted to completely "repeal" Obamacare, while moderates and leaders were willing to keep much of it as long as it cost less. Moving one way or the other lost too many votes. Democrats refused to participate. So, the bill died.
The debate over healthcare reform is in full swing, with forces aligning on all sides. From our perch, House Speaker Paul Ryan's health care bill has some appeal.
Considering that the Federal Reserve raised short-term interest rates by a quarter point, today's Fed statement was surprisingly dovish.
If robots are supposed to take all our jobs, they're not very good at it. Nonfarm payrolls rose 235,000 in February, rising faster than even the computer models thought they would. This was the 84th month in a row of private sector job growth, the longest streak on record.
As Washington DC melts down, entrepreneurs keep moving, people keep working and spending; the economy keeps growing. The Federal Reserve keeps meeting and speaking, too, but now it appears they will actually act.
We think it was Art Laffer who said it best. Let's say the US invented a cure for cancer and China a cure for heart attacks. If China decided to ban the cure for cancer, should the US retaliate by banning the cure for heart attacks?
According to the futures market, there is a 38% chance the Federal Reserve raises rates when it meets in mid-March. If the Fed were to stand by what it has said the past several years, the odds should be much higher. But the market is used to the Fed finding reasons to put off justified rate hikes.
The biggest tax debate in Washington right now is not between Republicans and Democrats, but between Republicans and Republicans. Both sides of the debate seem to understand that the US tax code, particularly the fact that the US has the highest corporate tax rate of any industrialized country, is harming the competitiveness of US companies.
The US economy has grown at an average annual rate of only 2.1% since the recovery started in mid-2009, far slower than during the economic expansions of the 1980s and 1990s.
After hiking rates in December, the chances of another rate hike from today's meeting were close to nil. But where changes, mostly modest, were made to today's statement, they point to a more hawkish stance.
The past several years have made many investors complacent about inflation. That complacency served bond bulls well.
A memorable part of President Trump's inaugural speech pointed to mothers and children trapped in poverty, rusted-out factories, a flawed school system, and crime and gangs and drugs. He described these problems as "American carnage" and stated emphatically that it "stops right here and stops right now."
Animal spirits are back!
Keynes thought a free market economy should be managed: in fact, needed to be managed. His ideas flourished in the 1930s when the US was in the Great Depression. Keynes believed that a lack of consumer demand was the culprit to economic problems and government should spend to boost jobs and economic activity.
President-elect Trump wants a Race Horse Economy, not a continuation of the Plow Horse we've had for the past several years.
We have used the metaphor of the "Plow Horse" to define the US economy since 2009 – an economy driven by new technology and entrepreneurship (fracking, the cloud, smartphones, big data...), but held back by the friction of a growing and burdensome government.
The Bible story of the virgin birth is at the center of much of the holiday cheer this time of year. The book of Luke tells us that Mary and Joseph traveled to Bethlehem because Caesar Augustus decreed a census should be taken.
The Federal Reserve unanimously decided to raise rates in 2016 – finally! – by a quarter of a percentage point earlier today, as the markets expected. The federal funds rate is now set to hover between 0.50% and 0.75%.
Since the presidential election, the S&P 500 is up 8.4%, the Russell 2000, a small cap stock index, is up almost 20% and the Dow is closing in on 20,000. Financial stocks have surged.
If there's one theme tying together many of the policies President-Elect Trump and Congress will try to enact, it's making the US a better place to invest.
According to the Merriam-Webster dictionary, a Populist is, "a member of a political party claiming to represent the common people." The opposite of populist is elitist. We don't think Mr. Moore was calling President Reagan an elitist, so what was he saying?
We agree that higher tax rates, more regulation and increased government spending are wet blankets on economic growth. We also think these policies hurt the very people they're designed to help.
The S&P 500 hit a low of 666 on March 6, 2009 and was up 213%, excluding dividends, through November 4, 2016. Since then, the S&P 500 is up another 4.6%, and closed just 0.5% from a new all-time high last Friday.
Elections have consequences and the impact on U.S. economic policy of last week's election will be enormous.
As election results rolled in last night, Dow futures fell as much as 800 points. The knee jerk reaction was that a Trump victory was bad for the financial markets. We disagree. Mr. Trump has the opportunity to cut the burdens of government, which could turn the US economy from a plow horse back into a race horse.
In the movie "Saving Private Ryan," multiple brave soldiers give their lives to save one (the last-surviving of four brothers) in World War II. During a final, chaotic and riveting battle scene, Ryan is miraculously saved, but with tremendous loss of life.
Through Friday, in spite of very good earnings reports from companies, the S&P 500 was down nine days in a row, the longest negative streak since 1980.