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.

First of all, take moment and read what follows.  I’ll comment at the end.

In what may be a surprising twist at the end of a strong year in the market, Boston Consulting Group found that fully 46% of investors were pessimistic about equity markets for the next year. 

The reading is up from 32% a year ago, and just 19% in 2015. 

As global equity benchmarks have rallied, more investors also see the market as too expensive. 

Fully 68% of respondents said the equity market is “overvalued,” more than double the 29% of respondents who thought as much last year. 

And nearly 80% of investors describing themselves as market bears cited “overvaluation” as the reason for their market pessimism, the survey found.

So, why the title?

Because this report of the report makes NO attempt to define the words or terms that I’ve bolded.

Exactly who were the investors?

How did the survey define pessimistic?

Equity markets are defined as only U.S. markets, or just any market?

Too expensive as compared to what?

Overvalued means what?  Is it the same as too expensive?  I guess they don’t want us to know!!

Market bears would seem to mean pessimistic, but does it?  It would certainly depend on how the question was asked.

Without the clear understanding of the words used in the survey, and better yet a copy of the actual survey, how are you supposed to make heads or tails from what it presented?

I don’t think you can.  As I said, fake news!

As the cryptocurrency Bitcoin hit a high of over $11,000 at one point this past week, more and more market watchers are predicting a crash of some severity.

“Predicting” being the key word here, and if you’ve read any of my material in the past you know what I think about “predicting”…..no one can do it!

Unlike most of those “gut calls”, one study in particular was actually backed up with hard data.

The study, entitled “Bubbles for Fama” was authored by Robin Greenwood, finance and banking professor at Harvard Business School, and Andei Shleifer, economics professor.

The researchers found that when an asset has a price run-up of 100% or more in a two-year period, the probability of a crash becomes 50%.  When focusing on run-ups of at least 150%, that probability jumps to 80%.  Higher than that and a crash is a near-certainty.

Of note, the authors focused on the stock market in their study, not cryptocurrencies.  But their research included nearly a century worth of historical stock data from around the world, and found similar conclusions regardless of the time period or country.

Bitcoin’s run-up over the last two years is nearly 2,500%.

But who is “Fama”, you ask? 

He’s a well-known academic economist who is also a leading proponent of the “Efficient Market Hypothesis”, which states that the markets have already efficiently and effectively incorporated all known information into its pricing.  But if that’s true, there can be no bubbles!

So, the authors are offering up their study of genuine bubbles to Professor Fama for his consideration….

As far as Bitcoin goes, or any other cryptocurrency for that matter, I’d be interested in seeing if you can actually tell me how it really works and how it’s regulated.

Shortly after the stock market rebounded from the depths of the financial crisis, Time magazine named Federal Reserve Chairman Ben Bernanke as its 2009 Person of the Year for the aggressive interventions he took to presumably prevent a second Great Depression.

Bernanke used his position at the Fed to blast trillions of newly printed dollars into the financial system to shore up almost every aspect of the nation’s financial system.  Investors were bailed out, banks were bailed out, but that avalanche of money somehow didn’t make its way into worker wages – arguably the most important measure of all.

Note: if you’ve read any of our Monday Morning Outlooks, you will know that the banks simply sat on the money, boosting their balance sheets, but not putting the money into circulation.

According to the Economic Policy Institute, in data from 2007-2014 all workers except those with advanced degrees actually lost ground in inflation adjusted (“real”) terms, and even those with advanced degrees didn’t experience any wage gains – they just didn’t lose ground like everyone else!

And, so if you only look at this rather old data, you wouldn’t know that things are really looking up.  Here are a couple of short paragraphs from yesterday’s report….

Either way, we expect very good sales for November and December combined. Payrolls are up 2 million from a year ago. Meanwhile, total earnings by workers (excluding irregular bonuses/commissions as well as fringe benefits) are up 4.1%.

Some will dismiss the growth as “the rich getting richer,” but the facts say otherwise. Usual weekly earnings for full-time workers at the bottom 10% are up 4.6% versus a year ago; earnings for those at the bottom 25% are up 5.3% from a year ago. By contrast, usual weekly earnings for the median worker are up 3.9% while earnings for those at the top 25% and top 10% are up less than 2%.
It all depends on your source of the information you’re reading about.  Look for ways to get other perspectives, not just the ones you agree with!

The last of the world’s major regional indices has finally gotten back to its 2007 highs. 

The MSCI Asia-Pacific Index includes stock markets in 15 Pacific region countries, including Australia, China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Pakistan, the Philippines, Singapore, Sri Lanka, Taiwan and Thailand.

The breaching of the 2007 highs happened a mere 56 months after the U.S. achieved the same feat in 2013.  It was a long time coming, but very likely well worth the wait.

Along with the markets now in a seemingly globally synchronized uptrend, economic conditions have similarly improved. 

Jeffrey Saut, chief investment strategist at Raymond James, released a research note highlighting the fact that global growth is expected to reach 3.6% next year—the best since the Great Recession.

Further, a report from Deutsche Bank Securities says this should result in the lowest-ever number of countries in recession next year.

So, is this the best time ever to invest now?  I’m not going that far, but when done correctly, the wind seems to be at everyone’s back now, so don’t be afraid to invest, making sure you take the appropriate amount of risk when doing so.

If you do, then you might want to see if you’re doing some very basic stuff – owning stocks!

As the stock market continues to hit new highs it might be a shock to hear how few Americans actually own stock.

According to a detailed study of stock ownership by New York University economist Edward Wolff, 84% of stocks available in the United States are owned by just the top 10% most-wealthy households.

Furthermore, more than 93% of all stock is owned by just the top 20% of households.

That means that the bottom 80% of households in the United States only own about 7% of the total stock market. 

And, he notes, his research includes everything, direct ownership of stocks and indirect ownership through mutual funds, trusts, IRA’s, Keogh plans, and other retirement accounts.

You can certainly say that the rich got richer, but I wouldn’t limit it to the rich.

Does any of this surprise you?

Maybe if you want to get rich you should be doing what they do!

We’ve been pounding this drum for quite a while now, so this should come as no surprise.

The Lords of Silicon Valley are supposed to be the drivers of our economy, and they certainly are this era’s economic rock stars.

But at least for now, according to this week’s Non-Farm Payrolls report, the lowly blue-collar folks out in “flyover country” are experiencing a renaissance in jobs that has been a long time coming.

Whether one credits Trump or not, the jobs growth is currently quite real in manufacturing – and, just for irony, note the decline in the high-tech “Information” category.

This is simply the reality that all of this is cyclical and positive activity in varying parts of the economy impact many other parts of the economy.

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.

Last week, at her press conference, Federal Reserve Chair, Janet Yellen said continued low inflation was a “mystery.”

She’s referring to Quantitative Easing (QE) and the lack of the economic evidence that it worked. The Fed bought $3.5 trillion of bonds with money it created out of thin air in an extraordinary “experiment” to avoid repeating the mistakes of the deflationary Great Depression. Milton Friedman was the leading scholar in this arena, proving the damage done by a shrinking money supply during the 1930s.

The money supply is a “demand-side” economic tool. A lack of money inhibits demand, while a surplus of money (more than the economy needs to grow) can cause inflation. The idea of QE (which has been tried unfruitfully for more than a decade in Japan) was to boost “demand-side” growth. And, yet, inflation and economic growth have both been weak. In other words, demand did not accelerate.

So forgive us for asking, but after unprecedented expansion of banking reserves and the Fed balance sheet, with little inflation, is it really a “mystery?” Or, is it proof of what we believed all along: QE didn’t work?

We get it. Just the fact that the US economic recovery started in 2009 and stock prices went higher is all some need to convince themselves that QE worked. But no one knows what would have happened without QE.

Back in 2008, even Janet Yellen knew there were problems with QE. During a December 2008 Fed meeting, she said there were “no discernible economic effects” from Japanese QE. Back then she was a Fed Governor and this was said during internal debates about whether to do QE. Today she leads the Fed and bureaucracies can never admit failure. So, the lack of inflation becomes a “mystery.”

Conventional Wisdom is so convinced that QE worked, it can’t see anything as a failure. QE supposedly pushed up stock prices and drove down interest rates, while at the same time boosting jobs.

As for the lack of demand-side growth, the explanations are confusing. Yellen says low inflation is a mystery, others say it’s because of new technologies, global trade, and rising productivity. Slow real GDP growth is blamed on global trade, a Great Stagnation in productivity and the lack of investment by private companies. QE gets credit for the things that went up, but things that didn’t are explained away, denied, or determined to be mysteries.

We have promoted an alternative narrative that agrees with the 2008 Janet Yellen – QE didn’t work. It flooded the banking system with cash. But instead of boosting Milton Friedman’s key money number (M2), the excess monetary base growth went into “excess reserves” – money the banks hold as deposits, but don’t lend out. Money in the warehouse (or in this case, credits on a computer) doesn’t boost demand! This is why real GDP and inflation (nominal GDP) never accelerated in line with monetary base growth.

The Fed boosted bank reserves, but the banks never lent out and multiplied it like they had in previous decades. In fact, the M2 money supply (bank deposits) grew at roughly 6% since 2008, which is the same rate it grew in the second half of the 1990s.

So, why did stock prices rise and unemployment fall? Our answer: Once changes to mark-to-market accounting brought the Panic of 2008 to an end, which was five months after QE started, entrepreneurial activity accelerated. New technology (fracking, the cloud, Smartphones, Apps, the Genome, and 3-D printing) boosted efficiency and productivity in the private sector. In fact, if we look back we are astounded by the new technologies that have come of age in just the past decade. These new technologies boosted corporate profits and stock prices and, yes, the economy grew too.

The one thing that did change from the 1990s was the size of the government. Tax rates, regulation, and redistribution all went up significantly. This weighed on the economy and real GDP growth never got back to 3.5% to 4%.

Occam’s Razor – a theory about problem-solving – says, when there are competing hypothesis, the one with the “fewest assumptions” is most likely the correct one.

The Fed narrative assumes QE worked and then uses questionable economics to explain away anything that does not fit that theory. It blames “mysterious” forces, both strong and weak productivity and claims business under-invested. We’ve never understood the weak investment argument; why would business leave opportunities on the table by not investing?

Our narrative is far simpler. It looks at M2 growth, gives credit to entrepreneurs, and blames big government. After all, the US economy grew rapidly before 1913 when there was no Fed, and during the 1980s and 90s, when Volcker and Greenspan were not doing QE. And history shows that inventions boost growth, while big government and redistribution harm it. Because it has the fewest assumptions, Occam’s Razor suggests this is the more likely hypothesis.

The Fed has never fracked a well or written an app. We understand that government bureaucracies want to take credit for everything. But, in spite of record-setting money printing, inflation did not rise. Prices are measured in dollars, so if those dollars had actually entered the economy, prices in dollar terms would have gone up. They didn’t, which clearly says that money didn’t enter the economy and QE didn’t work as advertised.

Some say that’s because the money went into financial assets, but if that was the case the P-E ratio for the S&P 500 would be through the roof. But because earnings have risen so sharply, the P-E ratio is well within historical averages based on trailing 12-month earnings and relative to bond yields.

We also understand that entrepreneurship is a “mystery” to some people because they can’t do it. Most people can’t change the world the way entrepreneurs can, but that doesn’t mean that by rearranging the assets of an economy in a different way, entrepreneurs don’t create new wealth.

By claiming that low inflation is a “mystery” the Fed is admitting it doesn’t understand the mechanics of QE. Yet, it is perfectly willing to allow people to think QE is what saved the economy. This is teaching an entire generation of young people, who in many cases don’t study economic history, that growth requires government intervention. The only “mystery” is why they would allow this to happen.

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 main stream 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.

In Jeff Rose’s new article for U.S. World and News Report,  Charles Scott shares his idea for saving money in retirement.