Fire and fury raged inside the Beltway last week in the form of a new book about President Donald Trump. Michael Wolff in "Fire and Fury: Inside the Trump White House" essentially claims that the President is “an idiot surrounded by clowns,” as one unnamed source puts it.
It’s a caricature, but so is the President. There’s nothing new in Wolff’s book that isn’t already widely known. We know that Trump tends to have the childish disposition of a school-yard bully. We know he is thin-skinned, and feels a need to respond to every criticism.
Psychiatrists are popping up all over the mainstream press claiming that the new book confirms that the President suffers from attention deficit disorder and narcissism. Trump isn’t exactly the first president to be a narcissist.
But he is the first to tweet lots of off-the-wall messages on a daily basis. Last Monday, North Korea’s deranged leader Kim Jong Un said he had a button ready to launch nuclear weapons installed in his desk. The next day Trump tweeted that he, too, has a nuclear button, “but it is a much bigger & more powerful one than his, and my Button works!”
Responding to questions about his mental health on Saturday, Trump tweeted, “Actually, throughout my life, my two greatest assets have been mental stability and being, like, really smart.” He said he was a “VERY successful businessman” and television star who won the presidency on his first try. “I think that would qualify as not smart, but genius....and a very stable genius at that!”
What if Trump is right, and all his critics are wrong? I know that sounds crazy, so perhaps I need to have my head examined. Then again, so should Mr. Stock Market! Apparently, investors aren’t worried that our President is deranged.
The market’s performance suggests they think Trump is crazy like a fox.
How else to explain that the S&P 500 is up 28.2% since Election Day, November 8, 2016 to yet another record high on Friday (Fig. 1)? The Nasdaq is up 37.4% over the same period (Fig. 2). Here’s the performance derby of the S&P 500 sectors since Election Day: Information Technology (44.2%), Materials (33.0), Industrials (30.4), Consumer Discretionary (29.5), S&P 500 (28.2), Health Care (25.1), Consumer Staples (8.7). Energy (8.6), Real Estate (6.5), Telecom Services (4.7), and Utilities (4.6) (Fig. 3).
Money flows also suggest comfort with Trump. Equity mutual funds and ETFs attracted $315.1 billion over the 12 months through November 2017 (Fig. 4). Money is still coming out of equity mutual funds, but that’s more than offset by hefty inflows into equity ETFs (Fig. 5). They attracted $355.8 billion over the past 12 months, with $197.8 billion going into equity ETFs that invest domestically and a record $158.1 billion into those that invest globally.
The interest in investing globally confirms that the stock market rally since November 8, 2016 isn’t all about Trump. Trump may think it is, but the rally has been mostly driven by rising earnings expectations as the global economy has continued to show more and more signs of booming without reviving inflation. In other words, while Washington is generating lots of noise, the global economy is providing a clearly bullish signal for earnings and stock prices:
(1) World stock prices. Since November 8, 2016, the All Country World ex US MSCI stock price index is up 23.9% in local currency and 28.1% in dollars (Fig. 6). Here is the performance derby over this period for the major MSCI stock market indexes in dollars: EMU (33.4%), Emerging Markets (33.1), US (28.1), World (27.4), Japan (26.1), and UK (23.0). In dollars, the rest of the world has been mostly outperforming the US, though much of that outperformance was attributable to the weaker dollar (Fig. 7). In any event, foreign equity markets’ solid gains certainly have more to do with the global synchronized economic boom than Trump’s presidency.
(2) Global PMIs. Debbie and I believe that the global economy fell into an energy-led growth recession during 2015. That was followed by a global synchronized recovery in 2016 and expansion during 2017. This year, there could be a global synchronized boom based on the strength shown late last year in many economies around the world. That’s confirmed by the global composite PMI, which rose to 54.4 during December, up from a recent low of 50.6 during February 2016 (Fig. 8). Leading the way higher over this period has been the global M-PMI, which rose from 50.0 to 54.5.
(3) Dr. Copper. The nearby futures price of a pound of copper rose to $3.29 on December 28, the highest since February 25, 2014 (Fig. 9). It’s up 28% y/y.
(4) Forward revenues and earnings. It’s too soon to tell how the cut in the corporate tax rate late last year will affect the consensus earnings estimates of industry analysts. Undoubtedly, they will be raising their estimates. But they may wait until they get more guidance from company managements during the Q4 earnings season this month. At the end of last year, weekly S&P 500 forward consensus earnings estimates through the 12/28 week resumed their relatively flattish trends during most of 2017 for both 2017 and 2018 (Fig. 10). Earnings estimates for 2019 have been moving noticeably higher during the final weeks of last year.
At the end of last year, industry analysts predicted that S&P 500 operating earnings per share will rise this year by $15.76 (or 12.0%) to $147.23 and next year by $14.99 (10.2%) to $162.23. (Joe and I are using $147.00 for this year and $157.50 for next year. We are assuming that the cut in the corporate tax rate will add $6 per share to this year’s earnings.)
Forward earnings—which will soon be calculated as the time-weighted average of 2018 and 2019 estimates—rose to a record high of $147.23 per share at the end of last year. It has been tracking the record-setting trend of forward revenues all last year. Those revenues won’t be affected by the tax cut as much as earnings will be in 2018. So we will be watching both of them closely in coming weeks. For now, it’s clear that the solid gains in both last year reflected the strengthening global economy.
Less Panic Prone
Crying “Wolf” no longer rattles the stock market. Joe and I continue to count the number of panic attacks in the current bull market in stocks, which started in 2009. We ambiguously define them as any significant selloff tied to panic-worthy news. There have been 59 of them by our count. There were only two short ones in 2017. (See our S&P 500 Panic Attacks Since 2009.)
Back in early 2013, when the panic attack about the “fiscal cliff” late in 2012 proved unjustified as fears didn’t pan out, I argued that we have nothing to fear but nothing to fear. I started to discuss the possibility of a meltup.
Interestingly, the market had another great day on Friday despite the fire and fury coming out of Washington about the President’s mental capacity. Instead, the market might be responding very positively to the tax reform plan passed late last year. Now there is talk of moving on to welfare reform and an infrastructure spending program. There is also more talk starting between North Korea and South Korea.
The Q4 earnings season is just starting, and investors are anticipating that many companies will be taking one-time charge-offs on deferred tax assets, but will have a lower tax rate for the foreseeable future. A few companies have announced that some of their tax windfalls will be used to make bonus payments to their workers. Some companies are likely to talk about how much money they expect to repatriate from abroad, and whether those funds will be used for buying back shares and paying out more dividends.
For all of these reasons, it’s hard to convince investors that they should be afraid of the big bad wolf.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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