April- Here’s To Your Wealth
Despite the abundance of bad news around the world and relentless headlines back home, the U.S. stock market continues to climb higher. According to BTN Research, through the first four months of 2017, the total return of the S&P 500 (i.e., through 4/28/17) is +7.2%, north of its +3.5% average return for the first 4-months over the last 25 years (1992-2016).
The stock markets have rallied for a variety of factors, notably stronger earnings and potential tax cuts. However, the markets also face the specter of a legislative setback out of Washington. While corporate earnings are the biggest driver for stock valuations, the increasing role of government leads Wall Street to keep a close on legislative developments. Click here for a recent appearance on Fox5 where I address these factors.
Looking beyond the legislative front and the potential benefits of tax reform, there are several reasons to be optimistic about the stock market rally continuing. For starters, corporate earnings should remain strong for the remainder of 2017. After an “earnings recession” that lasted for several years, the past few quarters have seen a rebound in corporate profitability. Years of cost cutting has helped, but the growth in top line revenue is also a factor.
Profits will also benefit from more relaxation of costly regulations. Over the past several years or even decades, the increasing creep of regulation has worked its way into the economy. No industry knows this more than the financial industry (which may have deserved this scrutiny after the 2008 debacle). In any event, the reality is that fewer regulations are good for the bottom line of businesses so less regulation is considered to be bullish for stocks.
Overseas, Europe is finally seeing slightly stronger growth which is reassuring investors who are looking beyond the deeply troubling structural issues with the major European economies. Aging demographics, high youth unemployment, assimilation of recent immigrants, weakness in the banking sector, and political uncertainty are all causes for concern. But the major economies are gradually strengthening and GDP numbers are reflecting that. Plus on a relative valuation, European companies sell for less than their U.S. counterparts which some see as a buying opportunity.
Despite all the talk about a potential Federal Reserve Bank rate hike, the reality is that interest rates are still quite low by historical standards both here and abroad. Overseas, the rates are even lower and countries like Japan are showing no signs of raising rates any time soon. On the flip side, these low rates are an indication that global economies, while improving, are not without risk.
Finally, our economy is benefiting from stable oil prices. We don’t hear much about oil prices when it stays in a trading range, and that is what has been happening recently. Generally speaking, when oil is in the $40 to $60 per barrel range, it offers a rosy scenario for both producers who can make a profit at that price level, and for consumers who can still find decent prices at the pump. At prices outside this range, there could be negative implications, but thus far in 2017 we have seen relatively stable prices.
Overall, the markets look to be rising on fundamental strength notably due to the increase in corporate earnings and the hopes of a tax cut. We expect the trend in rising corporate profits to continue in 2017. Near term risks to this rosy scenario include geopolitical risk and uncertainties about military conflicts. In the long term, we are concerned about the huge income gap and skill disparity throughout the U.S. and developed Europe and its impact on long term growth. Tens of millions of workers lack the skills to attain the financial life of the previous generation and technology is leaving them unemployed or underemployed. The wealth gap is widening and governments are running up huge deficits which will limit their ability to help on any real level. Hopefully our leaders will find some vision and enact meaningful legislation that addresses these important structural challenges. But for now, the party continues and there doesn’t seem to be an immediate reason to leave.
Learn more about Mark Avallone’s recently released book, Countdown To Financial Freedom
Mark Avallone, MBA, CFP®, CRPS®. www.PotomacWealth.com
Securities and Investment Advisory Services offered through H.Beck, Inc., Member FINRA/SIPC. 6600 Rockledge Drive, 6th Floor, Bethesda, MD 20817 301.468.0100. Potomac Wealth Advisors, LLC is not affiliated with H.Beck, Inc.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. Diversification and asset allocation do not guarantee against loss. They are methods used to manage risk.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
*The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Consult your financial professional before making any investment decision.This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested.
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