30 May

Always Look To Fundamentals…

Happy Memorial Day and many thanks to those who have served and are serving our country without hesitation and with distinction.  Barbeque party conversations today seem to have an overhang of gloom, tinged with worry and spiced with mockery. Politics still are “front and center” and nervousness about the future for America and for the post War institutions, which have created an era of peace and prosperity for many, is palpable.

But markets around the world have been of a different mind. Above, the reader will note the S&P 500 performance over the last few years depicted by the blue line. The red line looks at a measure of “worry”, which compares the VIX Index (volatility) to the 10-year Treasury yield (a measure of safety). Periodically, when the VIX/10-yr ratio spikes (times of great investor concern) the equity markets swoon. Interestingly, at the far right of the chart the reader will note the time of the Trump Presidency, from election to today, and the level of the VIX ratio – which has declined since his election. Investors have not seemed to be overly concerned about the main topic at most cocktail parties and cookouts, and “fodder” for jokesters on late night TV. So far, investors around the world have looked to fundamentals.

In Q1, earnings at US companies grew at the fastest pace in nearly six years. Earnings were up about 14% from the year earlier period and the gains were broad based – i.e. no one sector dominated. Further, the quality of earnings improved (and were not hyped by accounting methods) and company sales picked up almost 8% year over year – a demonstrable improvement vs. the recent past. This is happening around the world. S&P 500 companies have now posted earnings growth for three quarters in a row, which is expected to continue through the next quarter and the full year.

Recently, Robert Schiller, a Nobel laureate, who famously published his book “Irrational Exuberance” just before the Internet bubble burst in early 2000, opined that he thought stocks could rise as much as another 50% before the current bull market ends. For many who think this bull market is “long in the tooth”, this was a surprising comment from someone who is considered to be a very cautious prognosticator. Further, the European and Asian markets are thought to be of even greater “value”. How can this be after so long a rise in equity prices? Fundamentals – corporate earnings, sales, cash flow and dividends – are going up and so long as they rise while interest rates stay historically low, stock prices will rally in the US and elsewhere around the globe.

Capitalism rewards progress by enriching those who are innovative and productive. Incented to do better, millions of capitalists push the system to progress and historically have had remarkable success in doing so. Those who are pessimists, who fight capitalism, seemingly “swim against the tide”. Every now and again, the pessimists are correct in their worries and predictions. But history would strongly suggest that so long as fundamentals are strong, investors would be wise to be optimistic rather than pessimistic about world markets. Leave the worries with the barman.