The stock market is on a tear. The S&P 500 rose 19.4% in 2017 excluding dividends and is already up over 4% in 2018. It’s not a bubble or a sugar high. Our capitalized profits model, says the broad U.S. stock market, is, and was, undervalued.

We never believed the “sugar high” theory that QE was driving stocks. So, slowly unwinding QE and slowly raising the federal funds’ rate, as the Fed did in 2017, was never a worry. But, now a truly positive fundamental has changed – the Trump Tax Cut, particularly the long-awaited cut in business tax rates. With it in place, we think our forecast for 3,100 on the S&P 500 by year-end is not only in reach but could be eclipsed.

Before you consider us overly optimistic, we did not expect the stock market to surge like it has so early in the year. In fact, we would not have been surprised if the market experienced a correction after the tax cut. There’s an old saying; “buy on rumor, sell on fact.” So, with tax cuts approaching, optimism could build, but once they became law, the market would be left hanging for better news.

We would never forecast a correction because we’re not traders. We’re investors. Anyone lucky enough to pick the beginning of a bear market never knows exactly when to get back in. In 2016, it happened twice and we know many investors are still bandaging up their wounds from being whipsawed.

The market got off to a terrible start in 2016, one of the worst in years. The pouting pundits were talking recession and bear market, only to experience a head-snapping rebound. Then, during the Brexit vote, the stock market fell 5% in two days – which was seen as another indicator of recession. But, it turned out to be a great buying opportunity, like every selloff since March 2009.

The better strategy for most investors is don’t sell. Some sort of correction is inevitable but no one knows for sure when it will happen and few have the discipline to take advantage of the situation.

This is particularly true when risks to the economy remain low and the stock market is undervalued, which is exactly how we see the world today.

Earnings are strong (even with charge-offs related to tax reform), and according to Factset, since the tax law passed analysts have lifted 2018 profit estimates more rapidly than at any time in the past decade. Even the political opponents of the tax cuts are saying it will likely lift economic growth for at least the next couple of years.

Continuing unemployment claims are the lowest since 1973, payrolls are still growing at a robust pace, and wages are growing faster for workers at the lower end of the income spectrum than the top. Auto sales are trending down, but the homebuilding has much further to grow to keep up with population growth and the inevitable need to scrap older homes. Consumer debts remain very low relative to assets, while financial obligations are less than average relative to incomes.

In addition, monetary policy isn’t remotely tight and there is evidence that the velocity of money is picking up. Banks are in solid financial shape, and deregulation is going to increase their willingness to take more lending risk. The fiscal policy pendulum has swung and the U.S. is not about to embark on a series of new Great Society-style social programs. In fact, some fiscal discipline on the entitlement side of the fiscal ledger may finally be imposed.

Bottom line: This is not a recipe for recession.

It’s true, rising protectionism remains a possibility, but we think there’s going to be much more smoke than fire on this issue, and that deals will be cut to keep the good parts of NAFTA in place.

Put it all together, and we think the stock market, is set for much higher highs in 2018. If you’re brave enough to attempt trading the inevitable ups and downs of markets, more power to you, but as hedge fund performance shows, even the so-called pros have a hard time doing this. Stay bullish!

by Brian S. Wesbury, Chief Economist and Robert Stein, Deputy Chief Economist, First Trust

Note: We are happy to provide this perspective from First Trust for a couple of reasons – it makes sense to us and it usually takes a much different point of view from the mainstream media reporting.  It’s important that you know there are other takes on what’s happening in our economy and around the world.  We hope you enjoy it.  Charles Scott, Pelleton Capital Management.

Next Monday (October 9th) will be exactly ten years from the stock market peak before the Financial Panic of 2008.

Imagine that Doctor Doom, the perceived “best analyst in the business,” told you on that night, when markets peaked, that financial authorities would allow mark-to-market accounting rules to burn the banking system to the ground, with many well-known financial firms failing or being taken over by the government. You knew the unemployment rate was going to soar to 10% and the economy would experience the deepest recession since the 1930s. You also knew the US would soon elect a president that would socialize much more of the health care system, raise top income tax rates, and push the Medicare tax for high-income earners up by an additional 3.8%. Finally, you knew that ten years later all of those new taxes and expanded health care policies would still be in place.

Then imagine you knew the federal debt would be more than 100% of GDP, with massive annual deficits predicted as far as the eye could see.

Then, imagine you were allowed one investment choice, a choice you had to stick to for the next ten years, through thick and thin, no reallocation allowed. Put all your investable assets in the S&P 500, a 10-year Treasury Note, gold, oil, housing, or cash. Pick just one of these assets and let your investment ride.

Which asset would you have picked? Be honest! In that environment, with that kind of foresight, right at a stock market peak, it would have been awfully tough to pick stocks.

And yet, on the basis of total return, over the last ten years, that’s the asset that did the best. Assuming no major shift in the next week, the S&P 500 has generated a total return (capital gains plus reinvested dividends) of 7.2% per year, essentially doubling in value in ten years.

Gold did well, but lagged stocks, increasing 5.7% per year. A 10-year Treasury Note purchased that night (now coming due), would have generated a yield of 4.7%. Oil was a laggard, down 4.3% per year. Home prices increased about 1% per year, on average, and “cash” averaged 0.4%, both trailing the 1.6% average gain in the consumer price index.

You might have slept better by investing in 4.7% Treasury Notes. Certainly, the volatility of stocks, and the cascade of financial news headlines predicting doom and gloom over the past ten years, wouldn’t have bothered you as much. But you’d have fewer total assets today than if you would have kept the faith and stayed long stocks. And if you wanted to reinvest, now, for the next ten years, your rate would be roughly 2.3%.

If you knew exactly when to buy and sell each of these investments over the years, you could have done better, but no one did that and no one knew how to do that.

So, what’s our point? You would have been better off by ignoring all those pessimists who became famous in 2008-09. Investing in companies, and allowing world-class business managers to use your money to build wealth, was once again the best investment strategy. Ten years on, we still think that’s true.

by Brian S. Wesbury, Chief Economist and Robert Stein, Deputy Chief Economist, First Trust

Note: We are happy to provide this perspective from First Trust for a couple of reasons – it makes sense to us and it usually takes a much different point of view from the mainstream media reporting.  It’s important that you know there are other takes on what’s happening in our economy and around the world.  We hope you enjoy it.  Charles Scott, Pelleton Capital Management.

Market bulls will be emboldened by a bullish signal that’s about to flash—and has never been wrong.

Sam Stovall, Chief Investment Strategist at CFRA, notes that one indicator he follows is about to get triggered.  He notes that, since 1945, there have been 27 years when the S&P has achieved gains in both January and February.

The stock index then finished up for the year (on a total-return basis) in every single one of those years.

According to Stovall, that’s going 27 for 27, or batting a thousand.  The average rise in those years was a way-above-average +24% according to Stovall’s research.

While a heck of a precedent, past performance is no guarantee of future results!

Let me repeat this…..past performance is no guarantee of future results.

Let’s just see what happens.

A subtle change in the internals of the stock market bodes well for active portfolio investment strategies such as momentum, relative strength, trend-following, and even individual stock picking.

The change is a significant drop in correlations among stocks, away from the herd-like “risk on – risk off” moves in which all stocks go the same direction at the same time in the same magnitude, and usually for the same reasons.

That herd-like behavior dominated the 2009-2015 period, but during 2016 (and so far in 2017), correlations among stocks have fallen sharply, back to levels that predominated in the 1990-2007 era (a great era for those active strategies).

The lower correlations typically result in a much wider dispersion of returns, which means there are much greater differences between top performers and low performers.

Brian Belski, chief investment strategist at BMO Capital Markets, recently noted that active strategies “will be the key to delivering out-performance in the coming months, as opposed to the more passive strategies that have been mostly dominating the investment landscape the past several years.”

If any of you have read any of my comments about predictions, forecasts, outlooks, etc., you know how I feel about it.

It’s a bunch of crap!

Always has been.  Always will be.

And since now is the time the media scours the planet looking for pundits to give forecasts for this new year, it might be useful to inoculate ourselves against them by keeping in mind these wise observations:

“We’ve long felt that the only value of stock forecasters is to make fortune tellers look good.”
 – Warren Buffet

“We have two classes of forecasters: Those who don’t know – and those who don’t know they don’t know.”
– John Kenneth Galbraith

“Forecasts create the mirage that the future is knowable.”
– Peter Bernstein

“It ain’t what you don’t know that gets you into trouble.  It’s what you know for sure that just ain’t so”
– Mark Twain

Always has been.  Always will be.

So take it from those much smarter than me.  Run away from those that feel they know what the future will bring.

As this week marked the inauguration of Donald Trump to President of the United States, researchers at MarketWatch.com thought it useful to take a look at the stock market’s performance during the first 100 days of a new President’s term.

The results were surprising.

Most would assume that the pro “Big Business” Republican Party would have the highest gains, but it was actually the Democratic Party that had the higher returns.

Sam Stovall, chief investment strategist at CFRA reported since 1953 the S&P 500 has gained +1.6% on average during the first 100 days of a new President.

The first 100 days of Republican presidency in that time period have returned a loss of -0.4%, while the first 100 days under Democrat presidents returned +3.5%.  Shall we expect a similar result now?

As Stovall reminded readers, history is only a guide and “never gospel”.

As the Dow closes in on the 20,000 milestone, and the media goes nuts about it as if it was going to be the greatest thing since sliced bread, Mark DeCambre at MarketWatch (www.marketwatch.com) penned an article that asks the question, is reaching 20,000 really that significant?

After all, the Dow Jones Industrial Average represents only 30 stocks out of the thousands that make up the broader market.  Outsized moves in any of the 30 components can have a very big effect in the overall index.

As an example, the latest surge in Goldman Sachs has contributed about a third of the Dow’s recent 1,000 point move.  In addition, 1000-point moves aren’t as meaningful as they used to be.

When the Dow moved from 1,000 to 2,000 it was a 100% move, and the move from 4,000 to 5,000 was a 25% move.  But a 1,000 point move from 19,000 to 20,000 represents just a 5.3% advance.

Whether Dow 20,000 will be a ceiling or another milestone remains to be seen.  But in any event, this 1,000 point marker is less of a Herculean feat than ever before, as the following chart illustrates.

And this leads me to the question I always ask when someone says something like “I made $75,000 on my investments last year”.

First of all, congratulations, but more importantly did you start with $75,000 and make 100% on your money or did you start with $750,000 and make 10% on your money?

Yes, it’s still $75,000 more than you started with, but the percentage of return is the key differentiator when deciding whether it’s a big deal or not.  And that’s exactly what this Dow 20,000 is all about.

Makes for great media hype, and after all, isn’t that all the media folks care about….their ratings, them being first to a story – even if it’s not a story.

We’ve had clients over the years say that they get frustrated when then watch the financial news shows.

My advice for avoiding the frustration – don’t watch it in the first place!

Yale economist Robert Shiller appeared on CNBC this past week with a warning that his key measure of market valuation is at levels that have preceded most of the major crashes of the last 100 years.

Shiller’s “cyclically-adjusted P/E” or CAPE ratio, now stands at 27.94, a level that has been exceeded only in the 1929 mania and the 2000 dot.com rally.

Being extra-cautious with his wording, Dr. Shiller said “It’s not a good time, but I’m not saying to panic”.

This commentary from Shiller tracks the level of the CAPE ratio that we provide in “The Very Big Picture” section of our Monthly Market Commentary.

The chart below shows graphically that the CAPE is in territory only seen twice in more than a century.

So, is this any kind of guarantee that history will repeat itself?

Of course not, but caution should be observed.

What we basically never know is when this will happen, if it does, indeed, happen.  And there is where it gets complicated.

Pay attention.  Don’t freak out, just pay attention.  That’s what we’re doing.

Charles C. Scott, founder of Pelleton Capital Management in Scottsdale, AZ was recently featured in an article by Stephen Pounds for Bankrate.com. Scott weighed in on staying in the market after the long run-up in stocks.

When weighing whether to stay in the market after the long run-up in stocks or bail for an alternative investment, people are following Tina’s lead at the dance.

In investing shorthand, Tina stands for “there is no alternative.“

Safety and Stability

Charles Scott, a financial advisor with Pelleton Capital Management Ltd., also is sticking with the stock market, using a strategy called “position sizing.”

“This lets us take advantage of what’s going on, but with a predetermined amount of investment risk. Buy the stock, set the stop, calculate the risk, and buy the resulting number of shares to match the risk factor of the client,” Scott says.

To read the entire article, CLICK HERE.