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Investors Enjoy Riding Second-Best Bull Market Since 1928

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Tuesday, 21 Nov 2017 08:21 AM Current | Bio | Archive

Strategy: Devilish Bull Market. I would also like to thank Ron Howard and Tom Hanks. The former directed “The Da Vinci Code” (2006), and the latter starred in the film as Robert Langdon, a professor of religious iconography and symbology from Harvard University. It was during March 2009 that I morphed from being an investment strategist to being a symbologist. Back then, I was struck by the fact that the S&P 500 made an intraday low of 666 on March 6, 2009. I concluded that we had gone to Hades and would scramble to get the hello out of there.

The number 666 is associated with the Devil. After bottoming at that devilish number, the S&P 500 proceeded to double from there to 1332 by February 14, 2011, and triple from there to 1998 by August 26, 2014. If it quadruples from there, the S&P 500 would rise to 2664. That’s only 3.3% above Friday’s close (Fig. 1). If it gets there, the S&P 500 would be up 300% from the 666 low. It is already the second best bull market since 1928, only bested by the 582% gain from December 4, 1987 to March 24, 2000.

There are no devils in the details of getting to 2664 on the S&P 500. The forward earnings of this index rose to a record high of $144.29 during the week of November 16 (Fig. 2). The index’s forward P/E was 17.9 that week (Fig. 3). Those two numbers put the S&P 500 at 2579. Getting to 2664 would require only a minor increase in the S&P 500 forward P/E.

Given that the holiday season is ahead, Joe and I are already in a festive mood. We are raising our mid-2018 S&P 500 target from 2600-2700 to 2700-2800. The top end of this range is about 8% above the current S&P 500. If the multiple stays at 18.0, the forward earnings would have to rise to $155.67 by mid-2018. That’s realistic given that industry analysts are currently projecting $160.21 by the end of next year.

If the S&P 500 blows through 2700 and then 2800 by the end of this year or early next year with the forward P/E surpassing 20.0, we will be in a meltup most likely triggered by the passage of tax cuts before the end of this year.

US Economy I: Devilish Deficit. There is another devilish number out there. Once again, it is 666. The fiscal 2017 federal budget deficit reached $666 billion during the 12 months through September, before widening to $683 billion in October (Fig. 4). The 12-month sum of federal outlays rose to a record $4.0 trillion in October, while receipts have been relatively flat around $3.3 trillion since early 2016 (Fig. 5). What’s boosting outlays and weighing on receipts? Let’s have a closer look:

(1) Outlays. Federal outlays on goods and services, as measured in the GDP accounts, has been remarkably flat around $1.3 trillion since the start of the current economic expansion during 2009 (Fig. 6). The same cannot be said for federal spending on redistributing income. The sum of such outlays on Medicaid, Medicare, Income Security, and Social Security rose $828 billion since the start of 2009 to a record $2.6 trillion during the 12 months through October of this year.

Federal government outlays on redistributing income now account for 65% of total federal government outlays, up from 43% in early 1987 (Fig. 7).

(2) Receipts. Federal government revenues have flattened out over the past year as individual income tax receipts slowed, while corporate tax receipts declined slightly (Fig. 8). On the other hand, payroll taxes rose to a record high of $1.2 trillion over the past 12 months through October.

By the way, there seems to be a fairly large discrepancy between the National Income and Product Accounts (NIPA) measure of corporate taxes and the taxes actually collected by the IRS (Fig. 9). During Q2-2017, the NIPA number was $479.6 billion (based on the four-quarter average of the saar data), while the 12-month sum (through June) of the Treasury’s data showed $299.4 billion. This implies that the effective tax rate paid by corporations is even lower than the 21.3% shown during Q2-2017 in NIPA and well below the statutory rate (Fig. 10). We calculate that it was 13.3% during Q2-2017 based on the corporate tax receipts actually received by the IRS over the prior four quarters.

Could it be that Congress is about to cut the statutory corporate tax rate from 35% to 20%, which will amount to an effective tax increase on corporations? That’s what the data show!

(3) Deficit. It’s a wee bit unnerving to see that the federal deficit was $666 billion over the past fiscal year. I’m not concerned about that as a symbologist but rather as an investment strategist. Over the past year, the economy has performed very well, with the unemployment rate falling to a cyclical low of 4.1% during October. Arguably, the economy is at full employment. So why are we still running such a huge deficit? Now multiply that number by 10 years and add $1.5 trillion to this deficit if the GOP tax cuts are enacted. The result is another $8 trillion in federal government debt on top of the current $14 trillion. If interest rates ever go up again, watch how fast the debt will compound.

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.

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EdwardYardeni
It is already the second best bull market since 1928, only bested by the 582% gain from December 4, 1987 to March 24, 2000.
investors, bull, market, stocks
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2017-21-21
Tuesday, 21 Nov 2017 08:21 AM
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