Be Patient, Not Complacent

We spend our day reviewing all the facts, challenging our core beliefs and doing in-depth research on a global basis. I hate when the pundits agree with our stance. I prefer when our view differs from the majority as it gives us a distinct advantage.

The “experts” in this week’s Baron’s are forecasting 8-10% stock market gains in 2018 driven by earnings growth. Interestingly, few, if any, them, were optimistic about 2017. As you know, we forecasted 2400 in the Dow for 2017 early in the year when virtually no one saw it. We based our view on accelerating global growth, low interest rates and rising earnings. Our view never wavered and, in fact, was reinforced as the year progressed. We went so far as to predict that major tax reform would be passed by year-end 2017 or early 2018 followed by a trillion-dollar infrastructure program later in 2018 before elections. Well, both predictions seem likely to come true with benefits accruing to the U.S. economy, job and profit growth. The markets have more to run but not all regions or industries or companies will be treated equally.

We have also discussed over the last few months on how the pendulum has begun swinging back globally from restrictive financial and regulatory policies to more lenient ones that would encourage and support accelerating growth, not only for this year, but also for the next few years. It was our belief, which was reinforced this week, that bank capital ratios no longer would be mandated to increase to “reduce systematic risk.” Basically, enough was enough. An updated Basle III in Europe has put off any future mandated increase in bank capital and liquidity ratios for a few years at least. It had happened earlier in the year here, too, permitting our banks to not only increase lending but also to return more capital to its shareholders. A pro-business, pro-growth administration does not hurt in the States. China may be a different story, though, as the government clamps down on excessive leverage, but don’t cry for China as accelerating growth elsewhere will benefit its exports as seen in last week’s report where November exports rose by 12.3% in dollar terms versus 6.9% in October.

The bottom line is that growth around the world is accelerating as we enter 2018. In addition there are prospects of major tax reform and a trillion dollar infrastructure program to boost the U.S. economy whose benefits will spill overseas too. At the same time we still expect that inflationary pressures will build only modestly for all the reasons that we have discussed in the past and won’t reach that magic 2% threshold number that the Fed, ECB and BOJ watch so closely until the end of 2019.

Real economic growth, real volume growth, cost containment, low interest rates and much higher corporate profits is a pretty good recipe for higher stock prices. The wind is clearly to the investor’s back.

You must be patient to let all of this unfold. Construct your portfolio accordingly, but never be complacent as change is occurring all the time and the old rules no longer apply. Stay on your toes, review all the facts, watch government policies and interaction amongst the parties, see the competitive response that occurs from one region to another, and listen and watch how management reacts to this changing landscape.

Corporate management and boards have run defensively for so long that it will be interesting to see how they react to a new environment: real growth! Capital spending which has been held down for so many years is likely to accelerate big time both here and abroad as utilization rates are already strained. M & A activity will change from defensive to offensive reasons as the global landscape shifts. And there will be new winners and new losers as the status quo is out the window.

This remains a great environment for Paix et Prospérité. Change is everywhere; the status quo is no longer, and opportunities exist on both sides of the markets. We continue to knock the cover off the ball.

We will no longer offer specific investment advise, as it is unfair to our clients.

So remember to review the facts; pause, reflect and consider mindset shifts; always look at your capital allocation along with risk controls; do independent research and …

Invest Accordingly!

Bill Ehrman
Paix et Prospérité LLC

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