On October 14th I spoke with Stuart Varney concerning the impact on investors of a Hillary Clinton win coupled with a Democrat sweep of the House and Senate. While the market index moves so far have indicated a preference for Clinton over Trump, investors aren’t likely to benefit from a Clinton presidency.
A Clinton presidency would mean higher taxes, which is a headwind to growth. She has expressed a desire to increase taxes on investments, which makes them less attractive relative to other options. She’s also discussed increased regulations, which is already considered by the C suite folks to be one of the biggest challenges facing companies today. While the stock market indices have so far been more bullish when Hillary has a solid lead in the polls, investors should think through what her plans would mean for their bottom line as well as the bottom line of the companies in which they invest.
Markets are at all time highs, what is an investor to do? On August 13th I had the pleasure of speaking with Stuart Varney on Fox Business concerning the sky high valuations in the stock market amid contracting earnings, earnings which are also highly deceptive given the level of financial engineering management has used to artificially boost earnings per share through share-buybacks, which are often debt funded!
We’ve yet to see the economy return to pre-crisis normal growth rates and businesses around the country consistently site government red tape as one of if not their biggest burden. Meanwhile the markets wait breathlessly to dissect the latest words out of a Fed officials mouth. We now live in a world in which the asset prices are heavily dependent on commentary from unelected bureaucrats. Me thinks it unlikely that this all ends well!
Not entirely sure why I was smiling that much… I suspect I may have had just a tad too much coffee. Apologies for the dental display!
Yes, you read that right! In less than five minutes on with Stuart Varney I managed to discuss the likely next moves for the market, which candidates I think would be best for economic growth and the European immigration crisis… and that was on less than three cups of coffee. Although, to be fair, the sheer terror of making an absolute ass out of myself on national television does provide just a wee bit of adrenaline to put it mildly!
So market moves… S&P 500 went on a tear during the early part of March, but it looks to me to be mostly a momentum move with those stocks that got hit hardest performing the best, all the while earnings expectations keep getting lowered. Think about that for a moment, earnings expectations are lower in early March than at the end of January but stocks are moving higher? Companies are telling us their performance will be weaker than previously thought, yet investors are paying more for their shares? Yes, we’ve gotten a reprieve from crashing oil prices and that is certainly a welcome relief, but we are still facing a strong dollar headwind, as other nations continue to try to stimulate their domestic economies by devaluing their currencies, which regardless of what the Fed does, will strengthen the dollar. That makes U.S. exports less competitive. So while we could see this move up continue for a bit, when I look at all the data, I think it is more likely that this will be a bounce that won’t take us to new highs and the overall downtrend we’ve been seeing in equities since last May will eventually resume.
As for the candidates, I like to keep it simple. The bigger the government, the more opinions you get. The more opinions you have, the more the government gets involved in how businesses from the startup to the gargantuan are run. That makes it more expensive to run a business and makes businesses in aggregate less likely to expand as bigger government means more rules that they have to try and not break or offer the lovely little campaign donation here or there – still more expense. Given the headwinds the U.S. is already facing, more government red tape means less growth.
Next on to minimum wage, just look at what has happened in those cities that have significantly pushed up the minimum wage, such as Seattle. Many smaller businesses have shut down and unemployment for the lower paid wage earners has risen. That is not an improvement for the economy.
Next I look at the tax code. That thing is way too damn big and complex which means way too much time and effort is spent trying to figure out how to pay taxes and how to not pay more than necessary. That is time companies and individuals should be spending on doing what they do better, doing it more efficiently and doing it with a higher level of quality. Instead we have an enormous industry built up around figuring out how to dot i’s and cross t’s to satisfy a monstrously sized IRS. All that is money, time and effort NOT going into growing the economy.
As for the immigrant crisis, this is truly a humanitarian crisis of epic proportions, complicated by understandable fears of terrorism and violence. No nation, no leader has yet to get a handle on a productive way to manage this horrific problem, meanwhile innocent people are dying. They are dying when they try to escape their war-ravaged homes for a better life and they are dying when they stay home and try to fight to protect the land of their birth. There are no easy answers here and the strain of it all is putting enormous pressure on the european union, which is already wobbly with all sorts of debt-induced cracks.
On December 17th, I appeared on air with Stuart Varney to discuss a potential year-end rally in the stock market after the Fed’s rate hike came in around what was expected. I think a year-end rally is unlikely, and expect to see weakness in the stock markets as we move into 2016. We’ve already had three quarters in which revenues for the S&P 500 have declined and two quarters in which earnings have declined. We are seeing signs of weakness in the economy and the Fed’s rate hike impacts interest rates going forward.
One of the biggest factor pushing stock prices higher has been corporate buy backs, in which companies buy back their own shares, often issuing debt to do so. Think of just how destructive it is for a company to borrow money to buy back shares that then fall BELOW the price at which the company bought them! We are also seeing companies buy back shares while executives are selling their personal holdings – always something to look at if you are considering buying shares in a company. Higher interest rates make it more difficult for companies to issue debt in order to buy back shares and without corporate buy backs, we would have seen a net outflow from the equity markets. Tough to have prices go up when more people are leaving the stock market than buying into it!