The Trump bump stock market rally is fizzling out. The market is asking what happened to Trump’s economic agenda as the new prez and House Speak Ryan promote their version of an Obama Care replacement. CNBC says that there will be a Trump tantrum looms on Wall Street if Trump’s first legislative push fails.
The Trump Trade could start looking more like a Trump Tantrum if the new U.S. administration’s health-care bill stalls in Congress, prompting worries on Wall Street about tax cuts and other measures aimed at promoting economic growth.
Investors are dialing back hopes that U.S. President Donald Trump will swiftly enact his agenda, with a Thursday vote on a health-care bill a litmus test which could give stock investors another reason to sell.
“If the vote doesn’t pass, or is postponed, it will cast a lot of doubt on the Trump trades,” said the influential bond investor Jeffrey Gundlach, chief executive at DoubleLine Capital.
While health care stocks will be affected by how the health care bill turns out investors are more interested in the lack of progress on economic issues. After all the reason for the Trump post-election rally is the promise of tax cuts, repatriated offshore corporate cash and money poured into infrastructure repair. And if Trump and the Republicans who control congress cannot deliver on their first promise to repeal and replace the Affordable Care Act how will they do on the economic issues?
Is the Market Overpriced?
The concern about Trump’s economic agenda is that investors are pricing stocks based on perfect performance of the new prez and his Republicans. If these guys don’t deliver how painful will it be? That depends on how overpriced the market is. Forbes asks is the market expensive? They offer two sides of the argument.
“Frothy.” “Pricey.” “Stretched.” These are among the adjectives used to describe the stock market-and they’re not even the most ominous.
Nobel Laureate Robert Shiller recently told Bloomberg he believes the market is “way overpriced” and that the current elevated CAPE ratio of 29 is a “bad sign.” John Hussman, president of the mutual fund Hussan Investment Trust and a Ph.D. in economics from Stanford University, argues that the market may be due for a hefty correction. In Fortune this month, he was quoted as saying that the current market environment is in “the most broadly overvalued moment in market history” and that investors shouldn’t expect much in the way of equity returns.
Interestingly Warren Buffett disagrees.
Warren Buffett not only believes that the U.S. stock market is a good bet, he declared in a recent CNBC interview, “If there’s a game it’s very good to be in for the rest of your life, the idea to stay out of it because you think you know when to enter it-is a terrible mistake.” Buffett is steadfastly confident in our country’s economy and its ability to overcome adversity.
How is it that Buffett who famously says to buy when everyone else is leaving the market and sell when everyone else is buying is jumping into stocks so heavily right now? It has to do with the time frame. Buffett gets into stocks for the very long haul. Recently we asked how long does it take to make an investment long term. Ten years and longer is the answer. So Buffett trusts American business and the stock market and says that staying out is mistake. Nevertheless he is a firm believer in intrinsic stock value. What will happen if the market corrects on the basis of Trump’s failure to deliver on his economic agenda? Buffett will probably buy more stocks.
Despite continuing economic concerns in Latin America their stocks markets are doing well. Partly this is because of the commodity slump the reduced values in all nations that export raw materials. And, of course, there was the impeachment of Brazil’s president and Venezuela’s Chavez/Maduro meltdown. Nevertheless markets are doing well down south. CNBC offers three reasons why Latin American stocks will continue to soar.
If you just pay attention to the headlines, it looks as if Latin America has taken a turn for the worse. Data revealed last week showed that Brazil GDP contracted by 3.6 percent in 2016, prolonging its worst-ever recession, Mexico’s peso has been sunk by talks of U.S.-built walls and renegotiated trade deals, and Venezuela is nearing a total collapse.
However, stock markets tell a different story. In 2016 several Latin American markets began soaring, reversing years of negative returns. The MSCI Emerging Markets Latin America was up 21 percent, the MSCI Brazil climbed by 61 percent – it was the best-performing emerging market country last year – MSCI Peru rose by 53 percent, and others experienced gains as well.
Why is this happening? Here are the three reasons cited by CNBC.
New governments that are better run and pro-business
The impeachment of Dilma Rousseff was not an isolated event. Neither were the investigations into murder and corruption in Argentina. Many South American countries labored for years under corrupt and badly managed regimes and their removal has shown the light of day on corresponding economies.
Recovery of South American currencies
This is a result of foreign direct investment in these countries. More dollars are used to purchase the currencies of Brazil or Argentina and this drives up the value of those currencies.
Good and cheap deals remain
The markets in Latin America are still underpriced if you apply fundamental analysis and assess intrinsic stock value.
Currently, the S&P 500 is trading at 25 times earnings, while Latin America is trading at 14.3 times earnings, according to data from Credit Suisse. While that’s higher than it has been in the past, there are still plenty of good deals in the region, says Zamorano.
On a country-by-country basis, Peru and Colombia look cheap, trading at 12.3 and 11.9 times 2017 earnings, respectively. Brazil is slightly more expensive, trading at around 13.2 times earnings, but with an expectation of a turnaround – the country’s central bank is predicting 2.8 percent growth in 2018 – multiples will likely expand from here, says BlackRock’s Landers.
If you are not a fluent Spanish or Portuguese speaker you can still invest in Latin American stock by way of American Depositary Receipts. You can find lists of Latin American ADRs by country at Emerging Market Skeptic.
Cayman Islands ADRs
Puerto Rico Stocks
Central America ADRs
South America ADRs
The Federal Reserve is expected to raise interest rates again. The New York Times writes that the question is not why raise rates but why not.
The unemployment rate, one of the gauges the Fed watches most closely, fell to 4.7 percent in February, a healthy level by historical standards. Inflation, the other gauge, finally appears to be reviving. Prices rose 1.9 percent over the 12 months ending in January, close to the Fed’s 2 percent annual target.
The Fed continues to hold its benchmark interest rate at a level intended to stimulate economic growth by encouraging borrowing and taking risks. It sits in a range from 0.5 percent to 0.75 percent.
Everyone wants to expand the economy. The Trump market rally is based on the expectation of lower taxes, fewer regulations, repatriation of offshore corporate cash and infrastructure spending. But is that what it takes to make the economy hum?
The government estimates that the economy grew just 1.6 percent in 2016, compared with 2.6 percent in 2015. Moreover, private economic forecasters don’t see signs of an acceleration in the first quarter of 2017.
But the most important factor is the slow pace of productivity growth.
There are only two ways to expand an economy: add workers, or get more out of every worker. The domestic work force is growing slowly, and lately, so is productivity. Low interest rates can’t fix either problem.
Thus the Fed will likely deal with inflation by raising rates at a measured pace and leave economic stimulus to the administration and congress. And how do you profit from higher interest rates?
How to Profit As Interest Rates Go Up
The Motley Fool has a few suggestion of how to profit from rising interest rates.
Create a Bond Ladder
This is not a good time to lock money into long-term fixed-income instruments such as Treasury bonds. Build a portfolio of short-term notes that will periodically come due, perhaps a month after each meeting of the Federal Reserve.
Buy Treasury Inflation Protected Securities
These special bonds are backed by the full faith and credit of the U.S. government. They pay a fixed rate of interest twice each year, and the principal in them is also adjusted for on a semiannual basis. The government makes this adjustment based upon changes in the Consumer Price Index (CPI), which is widely considered the best indicator of inflation.
Invest in Banks and Financial Service Companies
The financial industry always profits when interest rates start to rise, as this means they can charge higher interest rates on loans and other financial products.
Take Capital Losses from Bonds and Bond Funds
Bond prices will start to fall in the secondary market when interest rates start to rise. This may offer a good opportunity to realize some capital losses in your fixed-income portfolio. These losses can be netted against any taxable capital gains that you realize during the year and also against other forms of income within certain limits, which will lower your overall tax bill.
To the extent that you expect rates to go up rapidly you will want to sit on cash or cash equivalents as longer term investments like solid dividend stocks come down in price to where they are a good deal.
Kodak was a great stock until digital photography came along. A great stock became a toxic stock. Beware of toxic investments and get out of stocks that are bucking the trends. The Motley Fool offers three stocks that could prove toxic to your portfolio.
Some industries just can’t compete with changing trends. Take retailers and offshore drillers, for example, which are struggling to contend with the lower-cost technological innovations of e-commerce and shale drilling, respectively. Because of that, companies in these industries are seeing their sales and profits sink, which is taking their stocks down as well. We don’t see either trend going away anytime soon, which is why stocks in these sectors could prove toxic to your net worth. Three stocks that we think could be particularly harmful are Stage Stores (NYSE:SSI), Target (NYSE:TGT), and Seadrill (NYSE:SDRL).
The Target security breach was a painful fiasco for the stock but Target recovered back in 2013. What has dragged down Target sales is a losing battle with the internet. Stage Stores are in worse shape. The current saving grace for Target is a healthy dividend but until the economy really starts humming and people buy in the store instead of online bricks and mortar retailers are toxic even at cheap prices.
When it became hard to find oil on land they started drilling offshore. This is more expensive but can be lucrative at the right oil price. Unfortunately the collapse of oil prices has hurt offshore oil and reduced the demand for oil exploration and drilling of new wells. More importantly oil fracking technology has gotten more efficient and more economical. If you are looking for new oil it is more profitable to look in shale formations than a mile beneath the surface of the Gulf of Mexico. Offshore oil drillers will be toxic investments for the foreseeable future.
Signs of a Dangerous Stock
How can you spot dangerous and toxic stocks? Mad Money has a simple suggestion for how to know that a stock is too dangerous.
Jim Cramer reminded investors that when they see a stock with an absurdly high yield, they need to stay the heck away from it.
“I don’t care how tempting the dividend looks or how cheap the stock seems. A super-high yield that is totally out of whack with its peers is almost always a sign that something is very, very wrong and you need to run, not walk away as fast as you can,” the “Mad Money” host said.
A classic case of this is with Frontier Communications, a small telecommunications provider with a monstrous 14.6 percent dividend yield that closed at $2.76 per share on Monday.
The stock might seem tempting, but buying a stock for that big of a yield is almost always a mistake.
The important part is the recent history of the stock. It was an $8 stock that lost two thirds of its value over the previous year. Look to see the dividend cut soon and the stock to fall even further. Beware of toxic investments.
According to CNBC you have to go back to 1994 to find a similar situation in the stock market. The S&P has gone a hundred days without a 1% dip. Besides being something they haven’t done for more than 20 years this low volatility may well predict a positive market going forward.
Since 1950, the market has logged only 21 other instances when the index traded without a 1 percent down day for 70 or more consecutive trading days, Johnson wrote in a recent report. The longest streak was in 1963, when the S&P 500 saw 184 straight trading sessions without a decline of 1 percent or more.
Interestingly enough, the S&P 500 in these 21 relatively quiet periods has generated average returns of 13.9 percent over the next year, with 85 percent positivity rate.
Long term technical analysis of this sort indicates a better market going forward than the apparent chaos in Washington might imply. In our article about why airlines are a better investment than they used to be we looked at why airline profit has little to do with Washington.
None other than Warren Buffett, who called airlines a death trap for investors, has poured $10 billion into the four major airlines in the last couple of years. Why are airlines better investments than they used to be?
Fewer airlines, lower fuel costs and more efficient operation are helping airlines make money and be better investments. None of these factors has anything to do with Trump’s tweets, congress repealing Obamacare or Russians hacking the US political process. On the other hand a trade war could be devastating for airlines and it would appear that the market does not see one coming. What do you do now if the market will be up next year?
Is It Time to Buy?
Folks who were badly hurt by the 2008 crash have been hesitant to reenter the market and have missed out on the rally so far. The Washington Post has a suggestion if you’re missing out on the stock market rally.
Investors have not been this bullish about the stock market in 30 years, according to a recent survey of market professionals done by Investors Intelligence, an investment research firm.
But this kind of euphoria can also make some investors nervous about what will come next. Are the recent highs a sign that the market is nearing a peak and ready for a tumble? (The last time investors were this optimistic was 1987, the year of the infamous “Black Monday” market crash.) Or is this simply the market breaking new ground as part of a long-term rally?
The jury is still out.
But in the meantime, investors looking to buy more stocks can take the guesswork out of the equation by spreading out their purchases over time, financial advisers say. “The biggest mistake I see investors make is they have an all-or-none mind-set,” says JJ Kinahan, chief market strategist for TD Ameritrade.
Low volatility may well be predicting a positive market going forward. And getting in bit by bit may well be a good idea. This market may well end up like the rest with a crash but if you stay in over the years you will tend to make money as the American economy grows.
The stock market just keeps going up. Is there an end in sight? Will this be a prolonged rally similar to what started in the Reagan years? What are the risks in today’s surging market? The upside to investing is the promise of lower taxes, repatriated corporate cash and an economic boom caused by infrastructure spending. The potential downsides include a trade war with China, more terrorism at home or a nuclear attack by the crazy leader of North Korea. Business Insider says that smart folks on Wall Street are sounding the alarm on the Trump bump.
The Dow Jones industrial average hit a landmark 20,000 on January 25, and the Nasdaq composite just hit a new record.
But the speed and scale of the rally – and the realization that Trump’s policies aren’t just good news for investors – has several influential voices in the market sounding the alarm.
Comments from the White House on issues ranging from currency devaluation to border taxes have put the market on edge. Worry about inflation is emerging, too, and there’s also concern about the overheated valuations on stocks.
The first risk in today’s surging stock market is simply that it is overpriced. The cyclically adjusted Shiller Cape Ratio is 28. In 150 years in the stock market it has only been this high in the 1990s tech bubble and before the 1929 stock market crash. The market has priced in tax cuts but it remains a question whether or not the Tea Party stalwarts in congress will go along. The same applies to implementing the return of corporate cash and fixing infrastructure. And then there is the otherwise unexpected.
North Korea and Other Crazy Regimes
As the ongoing drumbeat of government dysfunction continues in the Trump administration America’s enemies are emboldened. North Korea continues to launch missiles apparently fearing no retribution. McClatchy asks if the USA should prepare for a North Korean nuclear strike on the West Coast.
Many arms control specialists believe that, by 2020, North Korea could have the capacity to launch a miniaturized nuclear device on an ICBM, with the range to strike at least the West Coast. It might even have that capability sooner.
“The difficulty here is the lack of visibility into North Korea’s nuclear program. It’s a black hole,” said Anthony Ruggiero, a Korea researcher who previously worked in the Treasury Department, the U.S. agency tasked with enforcing sanctions on Pyongyang.
North Korea remains one of the world’s most closeted countries, and international inspectors haven’t had even partial access to its nuclear facilities since 2009.
The paranoid leader of North Korea thinks that a nuclear threat is the only way he can stay in power but if he oversteps what happens? Investors did not anticipate the Gulf War, the 911 terrorist attacks or the terrorist threat of ISIS in the wake of Afghanistan and Iraq. These are risks to a surging market that are hard to predict but argue for a degree of balancing in your investment portfolio.
The Tea Party movement arose in order to reduce the national debt and federal budget. Its aim has been to reduce government spending while also lowering taxes. The new president wants to lower taxes and raise spending on the military. Along the way the stock market has gone up in anticipation of lower taxes, offshore money coming home and economic stimulus from massive infrastructure repair. The problem is that while the Republicans control both houses of congress and the White House they do not agree on the ways and means to govern. The investor needs to wonder, will an unwilling congress kill the Trump market rally?
Not in the Short Term
Donald Trump gave an excellent speech before congress last night and in response to the more tranquil version of this president the market has hit an all-time high. We have written that at least for the short term it is not too late to buy into the Trump rally. But congress and the president need to start getting together and passing laws for the euphoria to last.
After a moment’s hesitation the stock market started to rally after the election of Donald Trump. Many stocks have peaked but it is not too late to buy into the Trump rally. Why is that? Forbes suggests a dozen stocks that could double under Trump.
Goldman Sachs recently recommended over 80 stocks that are poised to jump during President Trump’s administration.
That’s a lot of stocks. Not all of them are dividend payers, and many of them have already jumped dramatically in the last few weeks, bringing them at or near their 52-week highs.
You might think this means it’s too late to buy into the Trump rally, but it isn’t.
Out of the Goldman Sachs 80 the writer in Forbes picks a dozen. The list is heavy in low priced dividend stocks and is entirely comprised of companies with long track records of good cash flow and reliable returns.
Goldman Sachs was the leader again in the last market surge. Investors are looking for good news and baring good news they are looking for rationality in the current president and congress. The time to be concerned will be when spending bills get stalled, tax cuts get hung up and petty bickering becomes the order of the day, much like when congress let the government shut down a couple of years ago.
If You Want a Successful Long Term Investment
The stock market may continue to go up based on optimism or it may fall when congressional and presidential dysfunction returns. But if you are in it for the long haul remember how many years are required to make an investment long term and that it is a mistake to mix politics and investment strategies. If you pick stocks in companies with solid business plans they will be making money in ten, twenty and thirty years and returning value to along the way. Think in the long term and look for bargains today. Then you don’t need to worry so much about how dysfunctional congress might become.
People invest in stocks, bonds or real estate to make money. Citizens vote for politicians who will pursue policies that the citizens favor. In a recent interview Warren Buffett said that it is a mistake to mix politics and investment strategies. That Mr. Buffett is following through on this philosophy is borne out by the fact that he was an ardent Clinton supporter but has poured $20 Billion into the stock market since the election of Donald Trump. In an interview with CNBC Buffett said that how Trump handles the primary threat to US security is how he should be judged.
Buffett said on “Squawk Box” his top concern is how to prevent rogue nations from getting weapons of mass destruction, and he singled out North Korea as a specific threat.
The health of the economy at the end of four years is a second yardstick by which Buffett said he’d evaluate the Republican Trump administration.
“And then third, I’ll judge him on if the economy does well, which I expected it to do, how wide the participation in a better economy extends.”
To that end, Buffett told CNBC on Monday that mixing politics and investment strategies would be a “big mistake.”
Meanwhile to so-called Oracle of Omaha has poured money into the market.
“Probably half the time [in] my adult life, I’ve had a president other than the one I voted for,” he said. “But that’s never taken me out of stocks.”
But how does this approach work for so-called green investors of people who oppose the tobacco industry? The logical answer is that you do not need to invest in any stock that you do not like. And if you have a favorite that matches your social and political concerns go ahead and invest. But if what you want are profits it is a mistake to mix politics and investment strategies because the most socially acceptable stocks are often not the best money makers.
Long Term Money Makers
Part of why an investor like Buffett is successful is that he only invests in companies whose businesses he understands. And he only invests when he can safely predict profits into the ten year or more range. In this regard take a look at our articles about how many years are required to make an investment long term and what stocks make the most money over the long term.
Buffett’s second and third measures of how he would judge Trump are the growth of the US economy and whether or not the benefits of that growth are widely spread across the socio-economic spectrum. Companies like the old AT&T and General Motors grew with the country. So have Coca Cola, GE, Exxon and Proctor & Gamble. To the degree that your political concerns are primarily that the economy does well you may be mixing politics and investment concerns but in the end investment decisions should be based on intrinsic stock value and not the politics of the president. Pick your stocks based on expected profits and vote for president based on your social and economic concerns. And don’t mix the two.
People like Warren Buffett have made substantial profits from smart long term investing. Just how many years are required to make an investment long term? We can get a hint from the so-called Oracle of Omaha who says that he cannot outguess the market in the short term but has a pretty good idea of what will sell well ten years hence. Thus we should not be surprised when Market Watch says long run for investing is longer than you think.
There are certain truths that are etched into the brains of investors. They know that in the long-run, their portfolio returns will be close to the historic average of the stock market. In the short-run, they know that returns will fluctuate wildly. However, many investors have an unrealistic idea of when the short-run ends and the long-run begins. My clients are often stunned when I tell them that in the stock market, five years is a short-term time horizon.
From Feb. 1, 1988 to Jan. 31, 2017, the S&P 500 generated an average five-year compound rate of return of 9.83%. However, during the worst five-year period from March 1, 2004 to Feb. 28, 2009, the S&P 500 compounded at a rate of minus 6.63%. At the other extreme, the S&P 500 compounded at 28.56% from Jan. 1, 1995 to Dec. 31, 1999, according to S&P Dow Jones Indices.
Unfortunately, this wide-dispersion of returns causes investors to make big mistakes regarding their investment strategy or their investment professionals.
So, you need to stay in the market for longer than 5 years and perhaps even longer than 10 years to see the benefits of long term investing. But, what stocks do you buy. And when should you sell before waiting 5 or 10 years or longer?
How Does a Company Make Money?
For decades Eastman Kodak had a fantastic business model making film for cameras. Then digital came along and Kodak’s business model did not work anymore. On the other hand people still drink Coca Cola, eat M&Ms and use laundry soap. An investor could do a lot worse than follow Buffett’s thinking and pick stocks of companies that have been selling everyday items for years and will likely continue to do so for decades to come. Is there a good guide for when to buy and when to sell even though we are thinking in terms of a decade or more?
Intrinsic Stock Value
What is a stock selling for and what is it really worth? Many say that the market today is overvalued. That means that at current prices you are buying stocks that may well correct downward in the near future. A useful concept is intrinsic stock value.
In the aftermath of the stock market crash of 1929 in the early days of the Great Depression Benjamin Graham introduced the concept of value investing. No longer would those buying and selling stocks need to act like they were at the casino. With the concepts of intrinsic value and margin of safety Graham taught investors a rational means of investing in stocks.
The dictionary definition of intrinsic stock value is its fundamental value. It is obtained by adding up predicted future income of a stock and subtracting current price. It can also be seen as actual value of an equity versus its book value or market value.
Calculating intrinsic stock value takes into account the long term. If you see a Kodak-like situation emerging with a stock you will likely see that its intrinsic value is substantially below its market value. That is a stock to sell. Likewise if a company shows long term promise its intrinsic value may well exceed its market value and it is a stock to buy and hold. Then, to take advantage of the market you need to hold the stock for a decade or more in order to see the long term benefits of buy and hold investing.
The old saying is that if you want to be a millionaire, start out as a billionaire and buy an airline! But, what happened? None other than Warren Buffett, who called airlines a death trap for investors, has poured $10 billion into the four major airlines in the last couple of years. Why are airlines better investments than they used to be? Business Insider says that Buffett’s investment is everything you need to know about the airline industry.
Over the past decade, the landscape of the airline industry in the US has changed greatly. All four airlines have reported record profits, over the past two years, buoyed post-financial crisis capacity discipline, depressed labor costs, and cheap oil.
There are also fewer competitors in the domestic market to contend with.
In the year 2000, the sky was filled with names such as America West, US Airways, TWA, AirTran, Continental, ATA, and Northwest Airlines. By 2016, all of these brands had disappeared by being merged into or acquired by the Big Four.
The remaining big four U.S. airlines are these.
It should be noted that Buffett is investing roughly equal amounts in these four carriers. That would seem to be consistent with his stated philosophy of buying stocks for the long haul and only buying stocks when he has a clear idea of how the company makes money and will continue to do so for the foreseeable future. Airlines are better investments than they used to be because fuel costs are down along with other costs of doing business such as salaries. And the desperate game of underbidding to try to claw back passengers for rivals has pretty much gone away as the guys who were doing this have been absorbed into the remaining big four.
How Long Will the Good Times Last?
Is there still time for you to invest in US airline stocks or has the opportunity passed you buy? CNBC notes that aviation stocks are soaring but investors should be careful.
Investors have reason to be bullish right now on air travel, but domestic commercial airlines’ recent soar has some experts questioning whether there is still enough meat on the bone to get in now and still achieve above-average returns.
Several favorable market conditions continue to make airlines a good value stock: low fuel prices, low seat capacity and consolidation.
“It already had a great run, so there is always a question of ‘How much is left?'” said Jerry Braakman, chief investment officer for First American Trust, which oversees $1.1 billion in assets. The company bought stake in Delta for $10.41 a share in 2012. Last year it sold the last of its Delta stock for about $40 per share, believing the recovering airline had hit its peak. It is now trading at around $48.
Interestingly these folks looked at Delta and others as short term investments. They bought for the recovery and sold but it turns out that they sold too soon. Airlines will continue to be better investments than they used to be so long as the market remains only moderately competitive and so long as fuel and labor costs stay down. But if Trump economics really do end up stimulating the economy prices could go up across the board which could hurt the air carriers.