At least economically, the Trump administration has to be given credit for surprisingly strong performance. Second quarter GDP growth was upwardly revised to 4.2%. Unemployment is below 4% overall. Unemployment rates for Hispanic and African Americans are at all-time lows. Capital spending is rapidly accelerating as businesses take advantage of the 100% write-off available under the new tax law. Consumer confidence is at levels not seen since 2000. Corporate profit margins are at all-time highs. Even retailers, given up for dead a year ago, are reporting fantastic sales and earnings.
At this point, it appears that the North American Free Trade agreement will be successfully renegotiated. Getting Mexico to agree to some concessions was key. When NAFTA first came into being, the peso was 4 to the dollar, today it is 19. This currency devaluation hurt Canada as much as the US. So, when Mexico agreed to a deal that set most wages for car part manufacturers in North America at $16 per hour, it made the entire deal more palatable for Canada.
Clearly, tax cuts, deficit spending, reduced regulation, and economic nationalism are stimulating our economy. Good for us and good for the world! The US markets have reflected this good news. The dollar has been very strong vs other currencies. US stocks are back to the all-time highs made in January. The Federal Reserve will raise short term interest rates in a couple of weeks to 2-2.25% as they are concerned that the economy could overheat enough to get inflation expectations running hot.
The good news is out!
So, what about the markets?
Longer term bonds remain problematic. It is very likely that long term interest rates will rise once other central banks around the world start raising rates and reducing quantitative easing. But, intermediate term bonds should be fine. There was a seven year US Treasury bond auction today priced to yield above 2.8%. That is very close to long rates. Five to seven year paper looks attractive with not much duration risk.
Stocks certainly have responded to the good economic news. But, beware!
The Investor Intelligence survey this week reported 60% of advisors Bullish.
This is a number last seen in January when the market peaked. And, it is a signal of a dangerously overbought condition. With rates expected to rise, and the mid-term elections only 68 days away, we could be in for a rocky September. We would not be aggressively committing new money to equities today. The mid-term elections will soon become a source of uncertainty for investors. All the things that have made the market move up are great in the longer run. But, wait for a pullback of 5-7% before becoming more aggressive.
A note from WSC and WAMI . . .
Robert C. Davis is a Chartered Financial Analyst and is affiliated with Woodlands Asset Management, Inc. as a consultant. Founding partner of Davis Hamilton Jackson and Associates, a Houston based investment advisory firm; Bob is now retired and living in Chappell Hill, Texas. He now lends his expertise and knowledge of the markets to our company and customers. We hope you find it interesting and insightful.