Six months into President Donald Trump’s administration has actually sparked more questions than provide any answers, economic guru Nouriel Roubini contends.
Roubini says the main puzzle is the disconnection between the performance of financial markets and the real world.
“While stock markets continue to reach new highs, the U.S. economy grew at an average rate of just 1.9% in the first half of 2017 — slower than it had been growing in President Barack Obama second term — and is not expected to perform much better for the rest of the year,” he wrote for Project Syndicate.
“Yes, inflation is low, and corporate profits and stock markets are soaring. But the gap between Wall Street and Main Street is widening,” wrote Roubini, a professor at NYU’s Stern School of Business.
“In view of the Trump administration’s political ineffectiveness, it is safe to assume that if there is any stimulus at all, it will be smaller than expected,” said the CEO of Roubini Macro Associates.
“To benefit American workers and spur economic growth, tax reforms need to increase the burden on the rich, and provide relief to workers and the middle class. But Trump’s proposals would do the opposite: depending on which plan you look at, 80-90% of the benefits would go to the top 10% of the income distribution,” said Roubini, who has worked for the International Monetary Fund, the Federal Reserve, and the World Bank.
“More to the point, U.S. corporations aren’t hoarding trillions of dollars in cash and refusing to make capital investments because the tax rate is too high, as Trump and congressional Republicans claim. Rather, firms are less inclined to invest because slow wage growth is depressing consumption, and thus overall economic growth,” explained Roubini, who was Senior Economist for International Affairs in the White House's Council of Economic Advisers during the Clinton Administration.
“High market valuations that are fueled by liquidity and irrational exuberance do not reflect fundamental economic realities. An eventual market correction is inevitable. The only question is whom Trump will blame when it happens,” he said.
A "correction" is commonly defined as a temporary drop of at least 10 percent adjust for an overvaluation.
However, one of the most respected financial minds of modern times not only expects such a bump in market momentum, he sees it as a great buying opportunity.
Larry Kudlow advises savvy investors to expect a slight dip in the current bull market and be prepared to buy more shares if stocks fall up to 10 percent.
“Stocks, for the long run, are a great bet in America, a great bet in our free-market capitalism. You don’t want to sell now,” the CNBC senior contributor told "Big John & Ramblin' Ray" on WLS (890AM) in Chicago.
“I probably would love to see a 5-to-10 percent correction in the not-too-distant future,” the Newsmax Finance Insider explained, “because that would be an even better buying opportunity.”
Meanwhile, markets have been boosted in recent weeks by robust second-quarter earnings, and the strong July employment report on Friday added to the positive sentiment.
"We have strong earnings that is helping the market," Kim Forrest, senior equity research analyst at Fort Pitt Capital Group, told Reuters.
"I have seen a lot of companies exceeding their revenue growth and we also have better-than-expected global growth, which are the main drivers for equities."
Analysts, on average, expect S&P 500 earnings to have expanded 12 percent in the second quarter and project earnings up 9.3 percent for the September quarter, according to Thomson Reuters I/B/E/S.
However, the recent run-up has also sparked concerns about stretched valuations.
The S&P, which is up about 11 percent this year, is trading at 18 times expected earnings, compared to its 10-year average of 14, according to Thomson Reuters Datastream.
(Newsmax wires services contributed to this report).
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