The post-election stock market seems intent on rallying to the new highs typically associated with rapid economic growth. But, from a big-picture perspective, we haven’t seen any new data that would support that, except consumer confidence hitting its highest levels since before the financial crisis.
What’s Wall Street putting in the eggnog this holiday season?
I can tell you that: it’s purely good cheer. The kind that comes from looking ahead with rose-colored glasses. Sometimes the future is genuinely rosy, and sometimes it isn’t. But in this case, there’s good reason outside the official government statistics.
The rally is mostly psychological at this point. With the negativity of the election now over and with new information coming to light that should be good for jobs and business conditions, the market psychology is getting positively giddy.
While it’s not easy to track in the traditional sense, market psychology is key to understanding where we are in terms of the market cycle. When people are generally negative, stocks tend to go down most of the time. When they’re positive, they go up. When people are neutral or blasé, as they have been most of the past 8 years, there may be long periods with no discernable trend whatsoever— and the so-called sideways market develops.
Indeed, if I could go over and learn about investing from scratch again, I’d emphasize a lot of the formal financial categories like calculating bond yields and focus more on big-picture things like psychology. That’s because, at the end of the day, finance isn’t ruled by mathematical precision. It’s ruled by individual human beings with all of their faults, feelings, and follies.
Today’s rally indicates tomorrow’s expectation of faster economic and corporate profit growth. There are a few reasons to think why that may pan out.
First, there’s the job front. While headline unemployment looks great at 4.9 percent as of October, that number leaves a lot to be desired. It excludes 94 million Americans from the workforce. While some of those are retiring Baby Boomers— a big, growing demographic in the next decade—many of those are folks who have lost their jobs, used up all their unemployment benefits and haven’t been able to find a new means of employment.
That number is reflected in the labor force participation rate. This rate is 62.7 percent of the total workforce population, down from 66 percent a decade ago. Today’s rate is the lowest level since the 1970’s, when women were rapidly entering the workplace. In short, more than 1 in 3 people who are prime candidates for working simply aren’t.
While that drop doesn’t sound too steep, it represents millions of job hunters currently laid idle. With a Trump administration focused on jobs first, a rising participation rate will be a key criteria instead of headline unemployment numbers.
So, if today’s market rally is to continue, we’ll want to see that participation rate rise in the future. As it does so, expect stocks to rise.
Next, we’ve already seen how the incoming Trump administration will handle taxes and regulations. On the campaign trail, the Trump administration admonished several companies, including air conditioner manufacturer Carrier, for their decision to close up shop in the United States and relocate to Mexico.
The biggest problems with remaining in the United States involved taxation and regulation. The president-elect’s team already worked with Carrier to keep the plant open by offering tax credits in the state of Indiana. While Carrier’s taxes will be lower at the business level, they’ll be employing 1,100 people who will continue paying their taxes rather than drawing out unemployment benefits. It’s still a net benefit to the government.
The deal sounds like a win-win. It’s also a new record: a president fulfilling a campaign promise before even taking the oath of office.
We can expect these deals to unfold more uniformly once the administration takes office. With a focus on cutting taxes, a Republican tradition, the incoming team also promises cutting regulation as well. With red tape falling by the wayside, many of the hidden costs on businesses above and beyond taxes if they’re successful will fall by the wayside.
Admittedly the government shouldn’t be run like a business in the sense that it tries to maximize profits. When a government does that, we call it “seizing the means of production” and it results in economic collapse, not prosperity. But government doesn’t need to saddle others with needless burdens and harassment. Reducing the red tape allows government to act more business-friendly without acting more business-like. And if prosperity improves, government will benefit from higher tax revenues, even if tax rates go lower. It’s a win-win.
So, yes, it’s clear that the post-election cheer in the stock market is genuine. While it may peter out for a bit later this month if the Fed raises interest rates, we’ll likely see a continued rally into next year as these potential changes become reality. If there’s a huge pushback on changing tax rates or the size of the regulatory regime in Washington, however, we may see some difficulty there.
How to invest from these potential changes? Throwing darts at the stock page of the newspaper might work. But if you’re looking for something more specific or don’t subscribe to a newspaper, take a page from the Carrier deal.
Old-school, industrial names should get a breather and a new opportunity to profit from reduced regulations and lower taxes. That bodes well for companies like United Technologies (UTX), also the parent company of Carrier. Besides air conditioners, the company makes everything from elevators to security systems to aircraft parts.
Despite trading near 52-week highs in the optimistic post-election market, the company trades at a huge discount to the S&P 500 at only 12 times earnings. It yields 2.4 percent, and the company has a history of increasing the dividend a little every year. The company has beat earnings estimates in three of the last four quarters.
A company engaged in old-school manufacturing will be the poster child for the job-focused, regulatory-cutting political regime coming to America next year. That makes companies like UTX worth buying, as their performance will reflect on how well the job is being done in Washington.
Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and is managing editor of Financial Intelligence Report.
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