Risk/Reward Vol. 338
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Where to begin? Week one of the The Donald's Presidency has produced a plethora of executive orders. Obviously, they pleased Mr. Market. The Dow Jones Industrial Average crashed through the 20,000 barrier above which it now comfortably sits. The S&P 500 continues to flirt with 2300 and the NASAQ is at nose bleed levels. So is this steady march upward sustainable? Currently, the major indices are trading at 21 times trailing twelve months' earnings---high by historic standards but not as frothy as in 1999 when they were at 24x. That said, in the end, it is corporate profits that drive stock prices. And corporate profits are dependent upon economic growth. On Friday, the US Bureau of Economic Analysis reported that the nation's gross domestic product grew at an annualized rate of only 1.6% in the fourth quarter and only at 1.9% for the entirety of 2016. This is a far cry from the 4% growth envisioned by President Trump. Indeed, the US has not seen even 3% in GDP growth (which is our post WWII average) since 2005 and last experienced 4% in 2000.
If we are to reach The Donald's desired level of GDP growth, it will be for reasons different from what has fueled growth in the past. Mr. Market's recent euphoria notwithstanding, we, as a society, still face a demographic cliff about which Harry Dent has written extensively. See Vol. 218 http://www.riskrewardblog.blogspot.com/
. Our home grown population is aging and shrinking, and no country in the history of mankind has experienced economic growth during a time of declining population. Is immigration, legal or illegal, the answer? Are trade wars, where we beggar our neighbors, the solution? Who knows? But no one can doubt that the middle and upper classes are not reproducing. Look around. Thursday evening, Barb and I (and an entire airplane) were "treated" to a family of seven returning from Florida. Their obnoxious behavior aside, what struck me is that one almost never sees a husband and wife and five children. When I was young such families were commonplace. Most Catholic families had five children at a minimum and Protestants and Jews had three. This observation prompted me to research the enrollment of my old school district, the Metropolitan School District of Washington Township, Marion County, Indiana. Despite affirmatively recruiting from other districts, Washington Township today has only 11,300 students in K-12. That is an average of less than 1000 students per class. My graduating high school class of 1969 was the smallest of those attending school at the time and numbered well over 1100. Assuming the average then to be 1250 per class (low I bet), the enrollment would have been 15,000 or so, a 33% increase over today's number. How does an economy grow when schools are being shuttered?
Not surprisingly, Dow 20,000 came, in part, at the expense of the bond market as many participants continued to rotate out of debt and into equities. The yield on the all important (to me at least) 10 Year US Treasury Bond again flirted with 2.5%, but encountered resistance at that level. I have no doubt that there will be several more foray's into that territory if the stock market continues to rise. Those foray's alone will not cause me to sell, however. My interest rate sensitive portfolio was purchased at very favorable prices when the "spread" between the yield on the 10Year and that available from my favories was wider than normal. Thus, I have a cushion well above 2.5%. My concern is not if the rate on the 10Year rises above 2.5%, but rather the velocity of that rise and whether it portends sustained rates above 2.75%. If so, I will harvest profits and reenter only when prices reset
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