Does the Bull Have Legs?

Hello faithful readership! After a long sabbatical, The Barker Report is back.

It’s been a little over a year. And what a year! Last time I wrote you, Obama was still president, we were in shock at Trump’s victory, the UK had still not fully digested Brexit, the Dow was at 18,923, the S&P 500 at 2,180, and the NASDAQ at 5,275. In the UK the Prime Minister had a decent majority, and Brexit talks were under way. Germany, France and the Netherlands were heading for the polls.

One year later, the markets are hitting record highs, the Dow recently broke the 25,000 mark and is heading for 26K, and the NASDAQ closed at over 7,100. The bull market has been broad, and based on strong fundamentals. So the real question is: does the bull have legs or is this rally about to end? I will try to explain my views below:

The earnings are keeping up. Prices going up are backed by strong earnings. Companies are growing organically, as market confidence increases. Companies have beaten the earnings estimates on average every one of the last 3 quarters, and this is reflected in higher equity prices.

Returns to investors. Companies are using cash reserves to pay dividends to shareholders and to repurchase equity. Is is undoubtedly pushing up prices.

The passing of Trump’s tax reform. Trump’s proposed tax reform has been pushing the markets higher for a few months now. When it finally passed, a reversal was expected – with your run-off-the-mill buy on the rumor, sell on the news. But it had the opposite effect. Now the markets realize how the potential tax benefits may affect the bottom-line of several companies and are piling in on stocks ahead of those announcements.

Low interest rates. Although interest rates have been rising lately, they are still at record lows, and any stock with a decent dividend will provide better yields than bonds.

The bull market is global. Records are being set around the world. Most major economies and many emerging markets have seen records posted in their stock exchanges.

Traditionally, when rates go up, stock markets tend to reverse; however, the current rate hikes are demonstrations that both the economy and the markets can function without the need of stimulus, this is perceived as a rubber-stamping of the economy.

The markets have shaken off all non-positive and outright bad news, including the Korean crisis, Brexit, and much of the noise coming out of the Trump administration, they are not worried, they are not budging, they are relentlessly soaring.

Will the rally hold? That is a much harder question altogether. Although many of the points I mentioned above seem would seem to be relevant for the near future, there are a couple of topics that still need to develop, and could have a positive effect on the markets:

Tax reform. As mentioned above, we haven’t yet seen the real effect on companies’ bottom lines. Another major consideration is the potential influx of cash stashed abroad, resulting in more return to investors in the form of dividends or stock repurchases

Big infrastructure spend. Whether you like it or not, President Trump is trying as hard as possible to keep his campaign promises, one is that of spending in infrastructure, the other is to spend on defense. So far both sectors have risen along with the markets, but not nearly as much as they should have, if you keep in mind what the outcome of both policies could mean in dollar terms.

All in all, the bull seems to have legs, and there reasons to expect 2018 to be another good year. On my next post, I will talk about a bubble, and some other misprized assets.

See you next time!

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