The Market is so good that Trump can't mess it up

[Pete F.]

One can only hope

From Marketwatch
Tim Mullaney
It’s a funny time in the stock market right now: Wall Street is dominated by college-educated types, who, polls say, think Donald Trump is a joke whose trade policies are a mess that threaten the economic expansion.

And while you can find potential signs of the next U.S. downturn in housing data and in the chaos rolling through emerging markets, it’s hard to make a case that it’s here or anywhere especially close.

On the plus side, second-quarter earnings were just boffo. They really were.

So does that mean stocks have another 10% to climb this year? An increasing number of big and small outlets seem to be making the argument that they do, including at least three important reports this week from Goldman Sachs, BlackRock and veteran strategist/economist Hugh Johnson.

Everyone sees the ways that Trump’s follies should be harshing our buzz — exploding budget deficits, threats from tariff wars with a couple of dozen countries. But corporate earnings make the case that this rally is not over yet — especially since revenue went up by double digits for companies in the Standard & Poor’s 500 SPX, -0.76% , negating the argument that earnings gains were all about tax cuts and thus ephemeral.
Indeed, Goldman’s report this week is headlined “The Most Out-of-Consensus Question We Received: What If Activity is Better Than Everyone Expects?” And it’s backed by a similar analysis from buyside giant BlackRock, plus an update from Johnson, who argues that the bull market looks like it will last through 2019.

Goldman notes that earnings per share rose 25% in the second quarter, from a year ago — with the most earnings beats we’ve seen in seven years. They’re sticking with their forecast that the S&P will stay around 2850 through year-end — but say all the earnings beats could push it to 3150. If, that is, Trump eases his tariff battle with China and the Federal Reserve doesn’t rush interest-rate hikes. Sales rose 21% at technology companies like Amazon.com and Microsoft, Goldman said, and 12% overall.

BlackRock makes the point that U.S. earnings complement the looser monetary policy that China has adopted to offset trade tensions, and that an unusually high number of U.S. companies are raising profit forecasts.

“Almost 80% of the companies in the MSCI USA Index that offer guidance have raised their full-year forecast for earnings, sales or both so far this year,” BlackRock strategist Richard Turnill said. “This compares with an average of 63% since global financial crisis ended.”

Johnson argues that the Fed’s current pace of interest-rate hikes won’t cut into growth meaningfully for another year or more. Along the same lines, J.P. Morgan is out arguing that profit growth is going to keep investment moving forward.

“Companies spend if they have the money,” J.P. Morgan stock strategist Mislav Matejka says. There is “a clear link between profits and [capital expenditures], with profits leading. 23% EPS growth in the U.S. this year, on top of even stronger cash flow, is likely to lead to a move up in capex.”

None of this means Trump has done much to cause the good news. It’s easy to explain the robust economy as an extension of 2014, when the economy grew 2.9% versus the 3.15% annual rate of 2018’s first two quarters. Real income growth and job growth were better in 2014 than since Trump took over. The acceleration in 2014 was interrupted by a growth slowdown in Asia — crimping U.S. exports — followed by moderate growth in ‘15 and ‘16 as China’s markets stabilized.


The simple explanation is usually the correct one — and it says the economy is simply marching moderately forward as it has since 2010, in an expansion that’s not especially overheated yet, as soft wage and productivity gains imply.

Neither does it mean the market will rescue Trump’s party this fall, because there’s no association between stock returns and congressional elections. The Dow DJIA, -0.54% and S&P 500 all rose sharply in 2006, 2010 and 2014 — when sitting presidents’ parties got hammered in midterm elections. President George W. Bush’s party won eight net House seats in 2002 — a year the Dow dropped 17%. The worst incumbent-party wipeout in Senate elections ever happened in 1958 — a year the Dow rose 44%.

That means you should invest based on the economy — and not on politics, a point I’ve made before. Like the president or not, he matters much less than 328 million hard-working, creative Americans — whose companies are making a good bit of money right now. As we debate whether this president is traitor, a dope or just a bigot, that’s actually kind of a comfort.