AT 20800, the Dow Jones Industrial average has had a year to date price return of around 5.3%. This price-weighted index, however, is not a predictor of what is yet to come. The Stock market is priced off of Earnings and the multiple of Earnings. The average multiple forward PE ratios in US right now is around 18 and therefore the US stocks are richly valued. We don’t see the revenue growth to support the earnings growth. Therefore, if the US Tax cuts are postponed the market will pull back in a dramatic way. And there might be a catch-up with Legislative realities, which cannot take place in such short time. And these, even with government forecast are postponed till August 2017. That’s why one can look at Europe.
Some perhaps are euphoric because they remember the Bull markets during Regan and Clinton, when there were huge legislative actions and they got things done very fast. May be Gary Cohn, the chief economic advisor to President Trump, will be the next James Baker in Reagan’s era.
The truth, however, is that you cannot get the corporate profits without the GDP growth. And GDP growth is directly related to the cost of labour, which without immigration is difficult to contain. At the same time, President Trump is trying to put the dampers on immigration, in order to boost employment for the US Americans. Now, if you only look at the GDP, the US productivity numbers are fine. And in actuality you need more people to lower the cost of production but as mentioned before, this is contrary to the promises made by the present President. With not enough people coming in the workforce it might be difficult to reach the targeted 3% growth in GDP.
Another area in President Trump’s focus is banking. Donald Trump has an enormous focus on business and costing. And you can’t grow unless your banking system is expanding credit. With the low interest rates the US is driving with one foot on the gas and with the present regulatory overlay with one foot on the break. Therefore, Mr. Trump is correct to get rid of the unnecessary regulations, which have done nothing but to reduce the opportunity and increased the cost of borrowing. With increased credit at the present rates the companies will be intensified to grow.
But what Trump is also hoping for is for Europe to remain an absolute mess, keeping US margins very attractive for foreign investors. The US economy under Trump has a lot of leverage because a lot of investors don’t want to be stuck in Europe, where the wheels have never been put back on.
Europe might be a disaster, when looking at its political landscape, certain debt expenses and some of the banks. European PMI numbers, however, tell a very different story with some growth. Hence, all these headline noise about the effects of Brexit and Breakup of European union may never happen. Europe is not breaking up and certain European companies are more attractive compared to their US counterparts. European companies are having more earnings growth. Europe on average trades at 1 x PTBV, i.e., the tangible book value, whereas the US is trading at twice book value. Therefore, if there is any positive news out of Europe the stocks will rally massively. At the same time due to the higher multiples of the US stocks, any delay in any of the legislative decisions to lower the taxes or delays with the regulatory easing, the US stocks have more potential of leaving investors with greater share price losses.
The biggest threat in Europe right now can come from a sudden slowdown in Monetary Easing. If German inflation picks up and the European Central Bank (ECB) puts the breaks on growth. Ultimately, however, Germans are aware of the fact that a slowdown is detrimental for the rest of Europe and its cohesion for a strong Union. A sudden slowdown will destroy the marginal European nations like Italy, which has not had any growth for the past 10 years and they are desperate for any kind of growth in 2017.
As far as the currencies are concerned, Inflation & Deflation are one and the same. During inflation the currency loses value due to market forces, the prices inflate and rise faster than what is usual. Hence the government moves in and puts up the interest rates, in order to squeeze the market. During Deflation, however, it’s again the governments who push down the value of money, in order to get the markets started. And with both these scenarios, as the value of the money goes down, Gold becomes more attractive.
At Swiss Wealth Solutions, we spend a lot of time analysing the global markets with investments in global business and listening to today’s most important leaders. It is crucial to understand the present markets, in order to be prepared for tomorrow. Right now, as previously mentioned, compared to the growth in productivity and the earnings, valuations are high in the US. Hence, one needs to be cautious. The S&P and the Dow have broken all-time records on low volumes. Looking at the charts, the markets have been meandering with no real conviction. And therefore, you need to look at the balance sheets, and the earnings, in order to seek value. At Swiss Wealth Solutions, we are therefore agnostic as to which side of the Atlantic we find value and our trading strategies right now cover both the US as well as the European markets. There are however strategists who prefer emerging markets. Given the global uncertainties right now, we advise our clients to stay closer to the US and Europe and not to venture too far in search of yield. Because you cannot get more yield without taking even more risk.