The Gift That Keeps Giving

Posted on Updated on

January 13, 2020

 

Brian S. Wesbury – Chief Economist,  Robert Stein, CFA – Dep. Chief Economist,         Strider Elass – Senior Economist,  Andrew Opdyke, CFA – Economist,                              Bryce Gill – Economist

The US economy is not in an economic boom, but growth has been consistently faster than during the Plow Horse phase from mid-2009 through the end of 2016. Real GDP has grown at a 2.6% annual rate since the start of 2017 versus 2.2% beforehand.

But most analysts expect a noticeable slowdown in 2020; not a recession, but slimmer 1.8% real GDP growth (Q4/Q4). This is an even steeper decline than the 2.2% consensus forecast for 2019 that analysts made a year ago. By contrast, we’re forecasting real GDP growth in the 2.5 – 3.0% range in 2020.

We’re not trying to be contrarian, and don’t think that label applies to us. We’re not just saying “up” because others are saying “down.” The reason our forecast is different is that most analysts are Keynesians, and we’re supply-siders; they follow money, we follow incentives.

As a result, they think the extra economic growth related to the tax cut was a temporary phenomenon, due to putting more money in the pockets of consumers and businesses. Instead, we’re focused on what the changes to the tax law due to the incentives to work, invest, and run businesses more efficiently.

That last part is particularly important given that the incentive effects of the Trump tax cut were focused so heavily on businesses. Some analysts have claimed those tax cuts didn’t work, noting that business investment in plant and equipment hasn’t boomed.

But the way businesses operate has changed substantially over recent decades. The old way of raising worker productivity was by giving them more equipment. Now companies push the work, the decisions, to the consumer by using Apps. Instead of buying a shiny new computer, they figure out how to use computers and networks most effectively. No wonder corporate profits have remained at such high levels.

This may also explain why productivity growth has accelerated in spite of lukewarm growth in the dollar value of business investment. Productivity growth is normally strong early in an economic expansion, and then fades later on. For example, productivity grew 3.7% in the first year of the current expansion. In the next 61⁄2 years it grew at a very weak 0.7% annual rate (through the end of 2016). Since then, productivity is up at a much more respectable 1.4% rate.

The economic expansion isn’t going to last forever, but look for the US economy to continue to outperform the doubters until the doubters realize their model of how the economy works has a fundamental flaw.

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Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

https://www.ftportfolios.com/Commentary/EconomicResearch/2020/1/13/the-gift-that-keeps-giving

Blame the Overweight Jockey

Posted on Updated on

January 6, 2020

 

Brian S. Wesbury – Chief Economist,   Robert Stein, CFA – Dep. Chief Economist,        Strider Elass – Senior Economist,  Andrew Opdyke, CFA – Economist,                             Bryce Gill – Economist

The longest economic recovery on record continues, with January being the 128th consecutive month of growth. The first seven years, from mid-2009 through 2016 saw average real GDP growth of 2.2%. Since the start of 2017, US real GDP growth accelerated, to an average annual growth rate of 2.6%, while the unemployment rate now stands at the lowest level in 50 years (and is likely headed lower).

We attribute the acceleration to a combination of better regulatory policy and lower tax rates. These changes reduced impediments to growth, kind of like putting a lighter jockey on the horse. Steps forward for sure, but it could be better. The US grew at a 3.1% annual rate during the 1980s and a 3.4% rate in 1990s, both decades that saw recessions.

What gives? The US has not grown more than 3.0% for any calendar year (Q4/Q4) since 2005. Larry Summers, former Treasury Secretary, former head of the National Economic Council, and a possible Fed chief if the Democrats take the White House, says it’s “secular stagnation.” Summers thinks the US and other economies are in a long-term funk because of slower population growth, more inequality and low investment – which in economic terms means a shortage of demand.

The best way to address this, according to the secular stagnationistas, is to keep monetary policy loose and run large budget deficits. So, Summers was OK with the Fed’s cuts in short-term interest rates in 2019, and, although he opposed the Trump tax cuts, he has not loudly opposed budget deficits. Those who claim we’re in secular stagnation support more government spending on things like infrastructure, for example.

To sum it all up, secular stagnation theory means we should inject the economic horse with government-provided steroids.

An alternate theory comes from economists Carmen Reinhart and Kenneth Rogoff, who, in their book “This Time is Different,” argue that, after financial crises (such as 2008-09), economies grow slower. But here we are 11 years later, with consumer and corporate balance sheets in much better shape, and inflation and growth have still not returned to normal. The economic effects of the financial crisis should be past us by now. We never believed this theory and to see it fail isn’t a surprise. After all, the S&L crisis, Latin and South American debt defaults, and oil and ag bank problems, hit in the 1980s. In fact, adding up all the losses (and bank failures) from that period shows it to be worse than the 2008 crisis. But Reinhart and Rogoff ignored it because it didn’t fit their theory – the economy grew rapidly in the 1980s.

 

The reason their model didn’t work in the 1980s is because, contrary to other crises, President Reagan’s administration did not respond with massive increases in spending, regulation and easy money. Rather, the US cut tax rates, regulation, and non-defense spending, while running a tight money policy.

The economic horse accelerated, not by jacking it up with steroids, but by making the jockey (the size of government it must carry) lighter.

Looking at it this way explains slow growth in the past decade. Federal spending (excluding national defense and net interest) averaged 13.3% of GDP in both the 1980s and the 1990s. But in the 2000s, it averaged 14.2% of GDP and in the 2010s it averaged 16.2%. Every one of the additional dollars the government spent sucked resources out of the private sector, allocating them the way politicians wanted, rather than through voluntary private exchange. That made the economy less efficient and less able to grow.

In other words, the jockey got fat and weighed down the horse. If they truly want faster growth, policymakers need to focus on slimming down the government, not growing it under the guise of boosting “aggregate demand.” Tax cuts and regulatory relief help. More spending, more bank regulation and negative interest rates have failed to produce results. If we want 3-4% real growth in the future, spending restraint is the answer.

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Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L.P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

https://www.ftportfolios.com/Commentary/EconomicResearch/2020/1/6/blame-the-overweight-jockey

The Expansion Continues

Posted on Updated on

Brian S. Wesbury – Chief Economist,  Robert Stein, CFA – Dep. Chief Economist,         Strider Elass – Senior Economist,  Andrew Opdyke, CFA – Economist,
Bryce Gill – Economist

December 30, 2019

What a year!

As of the close on Friday, the S&P 500 was up 29.2% in 2019. At the end of 2018, we forecasted the S&P would hit 3100 this year. At the time, this was a very aggressive call. Then we doubled down at mid-year, lifting our forecast to 3250. At the end of last week we were only 0.3% away. Two weeks ago we made our case for 3650 by the end of 2020. That may seem overly optimistic to some, but we’re already only 12.7% away. Stocks remain cheap at the current level of profits and are even more so given expected earnings growth.

Meanwhile, we look for the economy to continue to grow at a healthy clip, reaping the benefits of a lower tax rate on corporate profits and less regulation. The economic consensus is that the US economy will grow only 1.8% in 2020 (on a Q4/Q4 basis), which would be the weakest growth since 2012. Instead, we’re forecasting growth in the 2.5 – 3.0% range. In particular, look for both home building and business investment to contribute more to economic growth next year than they did in 2019, while growth in consumer purchasing power continues to boost spending.

As you’d expect, given that we’re projecting better economic growth, we’re also forecasting a stronger labor market. The consensus says the unemployment rate will tick up gradually to 3.6% by the end of 2020, versus 3.5% at present. Instead, we see the jobless rate falling to 3.3%, which would be the lowest since the early 1950s. Job growth should stay healthy with accelerating wages, particularly among low-income workers, leading to continued robust increases in the labor force (the number of people working or looking for work).

The consensus says payrolls should grow around 130,000 per month in 2020, tilted toward the first half of the year due to extra Census-related hiring. We’d take the

“over,” with payrolls averaging more like 150,000 per month, and with the risks tilted more toward the upside.

On inflation, it looks like we’ll finish this year with the Consumer Price Index up about 2.2%, a small acceleration from the 1.9% increase in 2018. The consensus expects CPI inflation to fall back to 2.1% in 2020, but we project another acceleration, to 2.5%. Monetary policy is still loose and the M2 measure of the money supply has accelerated substantially this year. Look for further acceleration in inflation beyond 2020 unless the Federal Reserve reverses course, an unlikely prospect given the unnecessary interest rate cuts this past year and the Fed’s reluctance to raise rates during a presidential election year.

One of the persistent flaws in the economic thinking of many analysts and investors is that an economic expansion has to come to an end because of old age alone. History contradicts this widespread claim. Research from the San Francisco Federal Reserve Bank back in 2016 shows that old economic expansions are no more likely than young expansions to die in the following year.

Our view is that entrepreneurship and public policy matter the most. The animal spirits of US entrepreneurs are alive and well; think about the innovations of the last decade and how they’ve changed the world and our daily lives. The US has gone from the world’s largest importer of petroleum products to being a net exporter. Cancer death rates are headed down substantially. The value of the technology we can hold in our hands easily dwarfs what even the best desktops could do a decade ago. Meanwhile, public policy is helping boost growth rather than holding it back. No tax hikes, trade conflicts likely on the wane, less regulation.

The current expansion won’t last forever. But we don’t see it ending anytime soon.

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Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

https://www.ftportfolios.com/Commentary/EconomicResearch/2019/12/30/the-expansion-continues

S&P 3650, Dow 32500

Posted on Updated on

December 16, 2019

 

Brian S. Wesbury – Chief Economist,   Robert Stein, CFA – Dep. Chief Economist,       Strider Elass – Senior Economist,   Andrew Opdyke, CFA – Economist,                            Bryce Gill – Economist

 

A year ago, we projected the S&P 500 would hit 3100 at the end of 2019. In spite of the swoon in equities in the fourth quarter of last year, we didn’t see a recession coming and our model for estimating fair value for the stock market was screaming BUY.

At mid-year, seeing the economic and trade-policy stars aligning for further growth, and with our model for equites (more on that below!) still showing room for gains, we lifted our year-end forecast to 3250. At a Friday close of 3169, we were only 2.6% below that level with 16 days to go.

For 2020, we remain bullish. Our call is for the S&P 500 to end the year at 3650, which is about 15% higher than it finished on Friday, with the Dow Jones Industrials’ average moving up to 32500.

The first consideration we make when forecasting the stock market is whether we see a near-term recession. This step is important because even if the stock market is undervalued relative to long-term norms, a recession would almost certainly send equities lower in the short term; stocks would go from undervalued to more undervalued.

Needless to say, we don’t see a recession anytime soon. The economy is still adapting to lower tax rates and monetary policy remains loose. In addition, home builders are still generating too few homes given our population growth and scrappage rates, while banks are sitting on ample capital.

The second step, and usually the most important one, is to use our Capitalized Profits Model. The model takes the government’s measure of profits from the GDP reports, divided by interest rates, to measure fair value for stocks. Our traditional measure, using a current 10-year Treasury yield of 1.85% suggests the S&P 500 is grossly undervalued.

However, we think long-term interest rates are headed higher and this change can have a large effect on the model’s assessment of fair value. We anticipate that the 10-year Treasury yield will finish the year at 2.5%. Using 2.5% (instead of 1.85%) suggests an S&P fair value of 3775. In other words, we should finish 2020 with more room for the bull market to keep running.

In addition, it’s important to notice that in recent years operating profits generated by the companies in the S&P 500 have risen much more than the government’s measure of corporate profits that we use in our model. In the prior business cycle, the one that ended in the Great Recession, profits peaked in the second quarter of 2007. Since then, S&P operating profits are up 55% while the GDP measure of profits is up only 31%. This divergence suggests using the GDP measure of profits in our models may be underestimating the fair value of equities.

The biggest risk to our forecast is that someone on the far left wins the White House in 2020 and the Democrats simultaneously get a majority in the US Senate. We think that’s very unlikely. Most likely, the outcome of the election ensures that the tax cuts remain in place without any radical new entitlements or expansions of the entitlements already in place.

Like we said last year, this will probably to be one of the most optimistic forecasts you’ll see, if not the most optimistic one of all. But, in the end, we do best by our readers when we tell them exactly what we think is going to happen, without altering our projections so we can run with the safety of the herd.

Last year we told investors to “grit your teeth” because “those who stay invested in the year ahead should earn substantial rewards.” Our advice remains the same. The bull market is not yet done.

 

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Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

https://www.ftportfolios.com/Commentary/EconomicResearch/2019/12/16/sp-3650,-dow-32500

Good News is Good News

Posted on Updated on

December 9, 2019

Brian S. Wesbury – Chief Economist,   Robert Stein, CFA – Dep. Chief Economist,          Strider Elass – Senior Economist,  Andrew Opdyke, CFA – Economist,                              Bryce Gill – Economist

A year ago, conventional wisdom became convinced that a stock market correction was really the beginning of a “bear market,” and a sure sign that recession was on its way. Oops. Conventional wisdom was wrong again.

The Pouting Pundits still talk about ISM surveys being weak, and fret that a trade war is brewing. But, the S&P 500 is up 25% this year, and Friday’s report on the labor market ought to be the last nail in the coffin for the idea that the US economy is in trouble.

Non-farm payrolls grew 266,000 in October, easily beating consensus expectations, and exceeding even the most optimistic forecast from any economics group. Meanwhile job growth was revised up for prior months, bringing the net gain to more than 300,000.

Yes, the end of the UAW strike obviously boosted these numbers; payrolls in the manufacturing of motor vehicles and parts fell 43,000 in October and then rebounded 41,000 in November. That net turnaround of 84,000 accounted for most of the acceleration of overall payroll growth, which went from 156,000 in October to 266,000 in November. But the average gain in the past two months was 211,000 – very impressive. Especially with the unemployment rate below the 4.2% rate the Fed thinks our economy can sustain.

The jobless rate dropped back down to 3.5% in November, tying the lowest level in 50 years. The U-6 unemployment rate, which some call the “true” unemployment rate (it includes discouraged workers and those who work part-time but say they want full-time jobs), fell back down to 6.9%, tying the lowest mark since the peak of the internet boom in 2000.

Recent economic reports have also made a huge difference for fourth quarter GDP projections. In mid-November, the highly respected Atlanta Fed’s “GDP Now” model was projecting real GDP growth at an annual rate of only 0.3% in Q4, which would have been the slowest growth for any quarter since 2015.

The GDP Now model is a solid model, but we surmised at the time that it was putting way too much weight on the ISM Manufacturing reports, which were being held down by negative sentiment about the economy rather than a slowdown in the actual pace of growth. Instead, we stuck to our view that the economy was growing at about a 3.0% pace in Q4.

We still have plenty of economic reports to go before we see the first official glimpse on Q4 real GDP at the end of January. But the most recent run of the Atlanta Fed’s model now says 2.0%, not 0.3%. Getting closer!

It’s no wonder that the stock market liked what it saw on Friday, a robust job market and healthy economy, and lifted the S&P 500 to its second highest close on record, just off the November 27 all-time high. Only sixteen trading days remain this year (including today) and, as of Friday’s close, the S&P 500 is only 3.3% off our target of 3,250 for year-end.

And it’s not hard to find the catalysts that could help it get there, like a meeting of the minds between the Trump Administration and China, or one between Speaker Pelosi and the Trump Administration on the updated version of NAFTA. Then again, even without these agreements, the US economy is still in the longest sustained period of economic growth on record, while record high corporate profits continue to support a bull market that is almost 11-years old.

 

Screen Shot 2019-12-09 at 11.27.55 AM.pngConsensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

https://www.ftportfolios.com/Commentary/EconomicResearch/2019/12/9/good-news-is-good-news

 

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Don’t Worry About the US Consumer

Posted on Updated on

December 2, 2019

Brian S. Wesbury – Chief Economist,  Robert Stein, CFA – Dep. Chief Economist,        Strider Elass – Senior Economist,  Andrew Opdyke, CFA – Economist,
Bryce Gill – Economist

 

During the next couple of days you’re going to see lots of stories about the strength of consumer spending. Early reports say Black Friday on-line sales hit a record high, up 14% from a year ago, following a 17% increase on Thanksgiving Day itself. Black Friday sales at brick and mortar stores were up 4.2% from a year ago. So much for the theory that brick and mortar is dead or the economy is in trouble.

This shouldn’t surprise anyone who’s paying attention to underlying data on workers. The unemployment rate is hovering near a 50-year low, job growth remains robust, wage growth is solid, and wages are growing faster for low-income workers than high-income workers. Overall, private-sector wages and salaries are up 5.2% from a year ago. Meanwhile, we think the end of the GM strike means a sharp rebound in payroll growth in November.

In addition, consumers are in solid financial shape. Consumer debts are the lowest relative to assets since 1984. Household debt service relative to after-tax income is tied for the lowest on record (data go back to 1980).

However, it’s important not to let all the media attention on consumer spending distort the view of the way the economy really works. People can’t consume something until it’s been produced.

Yes, according to conventional statistics consumer spending is 68% of GDP. But GDP doesn’t count all economic activity; it uses the sales value of all goods and services (consumption and investment) to estimate production.

By contrast, economy-wide “gross output” includes not only business-to-consumer sales and investment but also what is not included in GDP, which is intermediate business-to-business sales, as well. Consumer spending is only 38% of economy-wide gross output. In other words, consumer spending is a much smaller part of total economic activity than GDP suggests.

That’s why, as much as we like to see solid numbers on consumer spending, we see this as an effect, not a cause of our bounty. The primary cause is the innovation and risk-taking of entrepreneurs. Which is why, if you want to know when the next recession is going to start, you need to pay careful attention to the environment for innovation and risk-taking, not how much people are spending.

Yes, when the next recession comes – and we don’t see one for at least the next couple of years – consumer spending will likely falter. But that doesn’t mean slower consumer spending caused the recession. It’s just the natural and eventual consequence of a less healthy environment for businesses, small to large. Less production would mean fewer workers and, in turn, less purchasing power.

So enjoy the good news you see the next couple days, but keep in mind that healthy growth in consumer spending is exactly what you should expect in an economy where tax rates are relatively low, business regulation has slowed, and monetary policy isn’t tight. If we’re right, we should see more of the same kinds of headlines for at least the next couple of years.

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Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L.P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

 

https://www.ftportfolios.com/Commentary/EconomicResearch/2019/12/2/dont-worry-about-the-us-consumer

 

 

 

 

 

Giving Thanks

Posted on Updated on

Brian S. Wesbury – Chief Economist,   Robert Stein, CFA – Dep. Chief Economist,       Strider Elass – Senior Economist,   Andrew Opdyke, CFA – Economist,                             Bryce Gill – Economist

November 25, 2019

 

What an incredible time to be alive! We stand just five weeks from the end of a decade that saw prosperity spread far and wide. Some don’t see it that way, as pouting pundits and rancorous politics skew our visions. But, if we simply step back from the day to day noise and take in the magnitude of progress around us, there is a great deal to be thankful for.

For starters, the US macroeconomy – the big picture – is in solid shape. The unemployment rate is 3.6%, just a tic above September’s 3.5% reading – the lowest since 1969. What some people call the “true unemployment rate” (known to the Labor Department as the “U-6” rate), which includes discouraged workers and part-timers who say they want full- time work, currently stands at 7.0%, and recently touched lows not seen since the peak of the first internet boom nearly twenty years ago.

Average hourly earnings are up 3.0% from a year ago, compared to an increase in 1.8% in consumer prices. In fact, “real” (inflation-adjusted) earnings are likely to be up again for the year, making this the seventh consecutive year of higher real wages.

Importantly, the benefit of earnings growth has been widening out. In the past year, median usual weekly earnings for workers age 25+ with less than a high school diploma are up 9.0%. In the year before, these wages were up 6.5%. This is faster growth than for those with college and graduate school degrees. Making jobs plentiful is still the best way to raise living standards.

Meanwhile, US equities have recently hit all-time highs, pushing IRAs, 401ks, pension funds, and retirement wealth higher. Both workers and investors have good reason to be grateful.

But it’s not only the big picture that looks good. The day-in, day-out lives of people the world over have improved because of the grit and determination of inventors and entrepreneurs.

 

A decade ago, how many of us had instantly ordered a car to pick us up via our phones (now more like pocket computers), and then watched its progress toward us in real time, not left to wonder when and if the car would ever show up? How many of us could optimize our travel routes with free apps that tell us the best time of day to take the route in question, or where to turn to cut travel time?

Think about the standardization of car and truck technology that used to be reserved for the upscale, like adaptive cruise control or blind-spot warnings, even self- parking cars. Backup cameras now come standard!

But it’s not just the day-to-day, innovation is also helping save lives in crisis situations. This includes the 3D printing of body parts…skin cells, lungs, and soon partial livers. Yes, livers! We are on the cutting edge of gene therapies that are being used to treat cancer. Cancer death rates have dropped consistently for decades, and new technology promises further improvement.

Think about the advances in energy production. The average price of a barrel of oil (West Texas Intermediate) was $78 in November 2009, a decade ago, and that was when the jobless rate was around 10% and the global economy in the doldrums. It’s now down to $58. Natural gas was trading around $3.70 per mmbtu, now $2.67. Lower prices are a direct result of the combination and widespread use of horizontal drilling and fracking. As a result, Americans can heat and cool their homes and businesses and travel for much less than they used to.

Put it all together and if we’re honest we have so much to be thankful for. There has quite simply never, in the history of mankind, been a better time to be alive. Our ancestors could find faults in some things in the world today, but they’d be left speechless at our abundant (and growing!) opportunity.

 

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Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L.P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

https://www.ftportfolios.com/Commentary/EconomicResearch/2019/11/25/giving-thanks

Long Live the Bull Market

Posted on Updated on

November 18, 2019

 

Brian S. Wesbury – Chief Economist,  Robert Stein, CFA – Dep. Chief Economist,        Strider Elass – Senior Economist,  Andrew Opdyke, CFA – Economist,                              Bryce Gill – Economist

 

Last December, almost 12 months ago, we set our year-end 2019 target for the S&P 500 at 3,100. Many thought we were way too bullish, but our model for the stock market suggested 3,100 was well within reach. We believed the bull market had plenty of room to run.

Now, with six weeks to go until year-end, the stock market has already closed above our initial target. As of Friday, the S&P is up 24.5% year-to-date, and up 32.7% since its Christmas Eve low. And that’s without including dividends.

We were so confident there wouldn’t be a recession – and that the market was still cheap – that we raised our target to 3,250 in the middle of 2019. That’s only 4.2% above last Friday’s close.

With one possible (and very unlikely) exception, nothing we see on the horizon suggests the bull market is nearing an end. We’re forecasting moderate economic growth for the foreseeable future, and see continued corporate profit growth as margins stay high.

Monetary policy is not tight, far from it, and we don’t see any hikes to short-term interest rates through at least 2020. And after many years of 6% M2 money supply growth, M2 has accelerated, growing at a 9.2% annualized pace in the past six months.

Corporate America is still adapting to a much more favorable tax environment. And trade policy is more likely to get better going forward, rather than worse.

The “new NAFTA” looks likely to pass by early next year, in part because as the Democrats target President Trump with impeachment, it becomes more important for them to reach some bipartisan goals. House Speaker Nancy Pelosi recently described a political deal on the trade pact as “imminent.” Mexico and Canada are the US’s #1 and #2 trading partners. A deal with #4, Japan, is being worked out and is already benefiting the US. Meanwhile, news reports suggest a deal with China (#3) is approaching.

Want more reasons for optimism? The ball and chain of regulation continues to ease around the ankles of entrepreneurs.  And a surge in the appointment of federal judges who believe in legislation, not administrative regulation, will make it tougher for the administrative state to hamstring innovation.

 

In addition, consumers have plenty of purchasing power, both from wage growth and relatively low financial obligations. Home builders still need to raise the pace of construction just to keep up with population growth and the scrappage of homes (including voluntary knock-downs, fires, floods, tornadoes, and hurricanes).

Notice, too, that the US isn’t alone in the stock market rally. The Euro Stoxx 50 is up 19.4% in dollar terms so far this year (as of the Friday close) while Japan’s Nikkei is up 18.2%.

We think those gains, at least in part, reflect investors looking ahead and expecting better policies. By cutting tax rates and regulation, the US has become more competitive. Eventually, the political pressure on other countries is to follow suit. When Reagan and Thatcher cut tax rates in the 1980s, many other countries took the cue, which led to a global boom.

One thing that could throw a monkey wrench into the bull market would be a shift by voters toward less growth-oriented policies of more government spending, expanded entitlements, and higher tax rates. This would take a sweep of the White House, House, and Senate with politicians willing to pass the votes. We put the odds of that happening at roughly 5%. We know investors are worried about this, but it’s way too early – and way too unlikely – to change investment strategies at this point. Think about it: if a sweep like this would cut the stock market by 25%, but has only a 5% chance of occurring, that’s a drag of only 1.25% on the market (5% of 25%).

A year ago, we were in the distinct minority in remaining bullish while so many were predicting the supposed “sugar high” was over and a bear market had begun. We didn’t see it that way then, we still don’t now.

Stocks are still cheap, the economy is not slipping into recession. The policy environment is tilted more toward growth than it was three years ago, even though it could be better. And that means the bull market should continue.

Date/Time (CST)

U.S. Economic Data

Consensus

First Trust

Actual

Previous

11-19 / 7:30 am

Housing Starts – Oct

1.320 Mil

1.320 Mil

1.256 Mil

11-21 / 7:30 am

Initial Claims – Nov 16

218K

217K

225K

7:30 am

Philly Fed Survey – Nov

6.0

8.7

5.6

9:00 am

Existing Home Sales – Oct

5.490 Mil

5.500 Mil

5.380 Mil

11-22 / 9:00 am

U. Mich Consumer Sentiment- Nov

95.7

95.7

95.7

Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

https://www.ftportfolios.com/Commentary/EconomicResearch/2019/11/18/long-live-the-bull-market

Income Inequality, Taxation, and Redistribution

Posted on Updated on

Brian S. Wesbury – Chief Economist,  Robert Stein, CFA – Dep. Chief Economist,  Strider Elass – Senior Economist,  Andrew Opdyke, CFA – Economist,  Bryce Gill – Economist

November 11, 2019

One of our favorite economic parables is the Fish Story, from Paul Zane Pilzer’s 1990 book, “Unlimited Wealth.” It is an excellent tool for thinking about wealth creation, inequality and redistribution.

Imagine 10 people live on an island. Each day they wake up, catch two fish, eat them, and go back to bed. Its subsistence living at the most basic level. There are no savings – no stored or saved wealth. If someone gets sick and can’t fish, there’s no way to help them. No one has any extra.

Now imagine two of these people dream up a boat and a net. They spend six days catching one fish per day, slowly starving, but they make the boat and net. On the 7th day, they go out into the ocean and catch 20 fish in the net – it worked!!!!

At this point, the island can go one of two ways. First, since two people now produce what previously took ten, resources are freed up to do other things. Farming corn, picking coconuts, cleaning fish, cooking, repairing the boat and net, the possibilities are endless. The island ends up with more (and better!) food, new technologies, higher standards of living, more assets, more wealth, and they can now afford to take care of their sick and vulnerable!

Or…the eight people who don’t have a boat and net could become envious. Two now produce ten fish per day, while everyone else can only produce two. Income inequality now exists: it’s no longer 1:1, it’s 5:1. So, they devise a plan to tax 80% of the income of the boaters (16 fish) and redistribute two fish to each of the other inhabitants.

If the second plan is adopted, no one is better off. Each inhabitant still only has two fish. Moreover, the entrepreneurs have no incentive to fix their boat and net. The island will eventually revert to subsistence.

This is the problem with taxation for redistribution: it robs the economy of the benefits of new technology. Certainly, some of our brothers and sisters need help, sometimes permanently; sometimes temporarily. However, taxation for redistribution doesn’t make the economy stronger; redistribution hurts growth.

Everyone on the island is better off because of the boat and the net. Taxing the inventors’ wealth or income and redistributing it removes resources from a highly productive new technology. Moreover, the income inequality that exists on the island is a sign of more opportunity, not less.

There are things the government can do that add to productivity – police and fire protection, national defense, enforcing the rule of law and protecting private property – but once government goes beyond this, it begins to undermine growth.

Today, 17% of all personal income is redistributed by government, while around 40% of all income is taxed and spent by the federal, state and local governments, combined. This is the reason the US economy has not attained 4% real GDP growth. European economies tax and spend even more and this is why they have grown slower than the US in recent decades.

In the meantime, government leaders around the world blame slow growth on a lack of investment by companies and attempt unsuccessfully to use negative interest rates to stimulate lending and investment. They also propose even more government spending and redistribution to help those that big government is holding back.

These policies won’t boost growth, and proposals to tax wealth and income because of the perceived problem of income inequality will ultimately reduce living standards. Increasing living standards requires less government, not more.

 

Income Inequality, Taxation, and Redistribution

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Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

https://www.ftportfolios.com/Commentary/EconomicResearch/2019/11/11/income-inequality,-taxation,-and-redistribution

No Recession on the Horizon

Posted on Updated on

November 4, 2019

Brian S. Wesbury – Chief Economist, Robert Stein, CFA – Dep. Chief Economist, Strider Elass – Senior Economist, Andrew Opdyke, CFA – Economist, Bryce Gill – Economist

Since the earliest days of the current economic expansion, there have been naysayers asserting the US was on the brink of another recession. Remember all the fear about another wave of home foreclosures, or a disaster in commercial real estate, or the Fiscal Cliff, or Greece potentially leaving the Eurozone, or German bank defaults, or even the inverted yield curve earlier this year? The list goes on and on.

One by one, the pessimistic theories have been proven wrong. Yes, the US will eventually fall back into a recession. But we don’t see it happening this year or next, and probably not in 2021, either.

It’s early, but we think the US economy is poised to grow around 2.5% in 2020, about the same pace as this year. Earnings remain at solid levels in spite of the headwind of trade uncertainty, which should diminish in the months ahead. Technological innovation is proceeding at an amazing pace. The key M2 measure of the money supply has accelerated; M2 is up 6.6% in the past year versus a 3.5% gain the year ending one year ago. Businesses are continuing to adjust to a lower corporate tax rate and a better regulatory environment.

This does not mean that every aspect of the US economy is going to be rainbows, teddy bears, and flying unicorns. We are not experiencing the rapid economic growth we had back in the mid-1980s or late-1990s. But the economy has picked up from the Plow Horse pace of mid-2009 through early 2017.

While we expect the economy to grow around 2.5% next year, some sectors won’t do quite as well. For example, fundamentals like driving-age population growth and scrappage rates suggest sales of cars and light trucks (like pick-ups and SUVs) will probably continue to slow somewhat in the next few years. This isn’t reason to shed macroeconomic tears, however. Autos sales have been gradually slowing since 2016 while the overall economy has accelerated.

Just look at Friday’s employment report, which beat consensus expectations and revised up job growth for prior months. Unemployment ticked up to 3.6%, but essentially it was unchanged (from 3.52% to 3.56%) and is at a 50- year low. And, just about every category – female, non- college graduate, minority groups – are seeing unemployment rates near the lowest levels on record.

Although some analysts are bemoaning softness in business investment, “real” (inflation-adjusted) business investment is still 14.3% of real GDP, which is a higher share of real GDP than in any previous business cycle expansion. As a result, while productivity growth looks to have been tepid in the third quarter, the underlying trend has picked up, and that means faster growth in living standards than during the Plow Horse phase of the expansion.

Perhaps the biggest oddity is that Federal Reserve just finished cutting interest rates at three consecutive meetings. At the end of 2018, the Fed was projecting it would raise short-term interest rates 50 basis points this year, while forecasting the US economy would grow 2.3%, unemployment would drop to 3.5%, and PCE prices would increase 1.9%. The forecasts for growth and unemployment look solid, although PCE prices will be up more like 1.5% this year versus 1.9%. That shortfall in inflation doesn’t justify a turnaround from planned hikes to three cuts.

In turn, the current stance of monetary policy – and the Fed looking unlikely to raise rates anytime soon – suggests the path ahead is solid for economic growth and bullish for equities.

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Date/Time (CST)

U.S. Economic Data

Consensus

First Trust

Actual

Previous

11-4 / 9:00 am

Factory Orders – Sep

-0.5%

-0.2%

-0.6%

0.0%

11-5 / 7:30 am

Int’l Trade Balance – Sep

-$52.5 Bil

-$52.5 Bil

-$54.9 Bil

9:00 am

ISM Non Mfg Index – Oct

53.4

53.6

52.6

11-6 / 7:30 am

Q3 Non-Farm Productivity

+0.9%

+0.1%

+2.3%

7:30 am

Q3 Unit Labor Costs

+2.2%

+2.9%

+2.6%

11-7 / 7:30 am

Initial Claims – Nov 2

215K

215K

218K

2:00 pm

Consumer Credit– Oct

$15.0 Bil

$15.1 Bil

$17.9 Bil

11-8 / 9:00 am

U. Mich Consumer Sentiment -Nov

95.5

96.0

95.5

Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

https://www.ftportfolios.com/Commentary/EconomicResearch/2019/11/4/no-recession-on-the-horizon