Rising rates and trade tariffs are headwinds to further stock price gains. Stocks generally like a strong economy, the recent unemployment rate of 3.8% is the lowest since 1969, plus rising earnings.
First quarter earnings were up more than 24% according to FactSet. Our forward P/E ratio
for the S&P 500 is now 16.5 times a $165 estimate. The P/E ratio is above the 5-year average of 16.2 and the 10-year average of 14.3, however interest rates are lower than the averages over that time frame.
Share buy backs are on the rise as are dividend payments by corporations are at record levels.
The U.S. 20-year Treasury Bond ETF, TLT, is down 5.19% year to date, despite a recent rally on Euro breakup concerns. MUB which is the iShares National MuniBond ETF is down 1.65% in 2018.
Our assessment continues to be that we remain in a long term bull market. Stocks will likely
outperform bonds this year once again. Wage inflation and core CPI will remain muted and the
FED will continue to raise the Fed funds rate but not aggressively. Barring a full-blown trade war,
stocks will remain in an uptrend.
At 2747 on the SPX we have rallied 51.8% off the 1810 low in February 2016. We have already had
a 10% drop from the 2872 highs in January 2018, far more volatility than 2017 with a steady diet
of Fed interest rate hikes.
Despite all this, stocks continue to rise having touched critical support lines several times this
year and bounced higher. If earnings continue to move up and the economy expands share
prices will likely rise further.
If you bought stocks in Sept, 2007, held on for 10 years through a scary period of two wars, a
major recession, financial meltdown, a 50% market decline and three different presidents,
stocks still retuned +7.2% annually through Sept 2107. Cash was +0.4%, 10-year treasuries +4.6%
with a CPI of +1.7%. Gold managed a +5.7% gain while oil lost -4.3% and home prices were down -1.0%.
