Home Logon FTA Investment Managers Blog Subscribe About Us Contact Us

Search by Ticker, Keyword or CUSIP       

Blog Home
   Brian Wesbury
Chief Economist
X •  LinkedIn
   Bob Stein
Deputy Chief Economist
X •  LinkedIn
  Rally is Real, Not “Hope & Faith”
Posted Under: Bullish • Markets • Monday Morning Outlook • Stocks

Since the presidential election, the S&P 500 is up 8.4%, the Russell 2000, a small cap stock index, is up almost 20% and the Dow is closing in on 20,000.  Financial stocks have surged.

This "Trump Rally," just like the entire 2009-2016 bull market – which pushed up stocks more than 200% - has its detractors.  We heard it over and over in the past eight years, and now we are hearing it again – "the market has moved too far, too fast."

This rally, they say, is based on "Hope and Faith."  After all, nothing has changed yet.  It's wishful thinking.

We could not disagree more.  According to our capitalized profits model, the market was undervalued by roughly 30% on election day.  In fact, it was undervalued for the previous eight years as well.

We believe the reason it was undervalued was because government policy was constantly making it more difficult for free markets to operate.  Higher taxes, higher spending and more regulation increase the risks to future growth.  It's why we have had a Plow Horse economy.  At the least, these policies are now stopped, at best, they will be reversed.

Next, profits are rebounding.  It's true that in 2014-2016, the drop in oil prices undercut profits, not just for energy companies, but for ancillary businesses (trucking, machinery, materials), as well.

Profits hit an all-time record high in the fourth quarter of 2014, then fell.  Now, oil prices are stabilizing, which helped economy-wide corporate profits rise 6.6% in the third quarter.  After Q3, profits now stand just 2.8% short of that previous record high.          

So, instead of asking why the market is up, investors should be asking why wasn't it rising more before?  After all, with profits turning the corner in an already undervalued state, the market should be up.

But it was hard for stocks to rise with such a bad set of fiscal policies.  And, following such a surprising election outcome, it is clear that these policies will change.  The election may not herald a new era of free market perfection, but investors can be confident that, overall, public policy isn't going to get worse and may get much better.  The US is moving out the public-policy elite of the Ivy League, and moving in an all-star cast of adjunct professors.  Markets know that this infusion of real world experience will push policy in a much more market friendly direction.  It's not just "hope and faith," it's an entirely rational response to a radical shift in economic policy.

Brian S. Wesbury - Chief Economist
Robert Stein, CFA – Deputy Chief Economist

Click here for PDF version

Posted on Monday, December 12, 2016 @ 1:37 PM • Post Link Print this post Printer Friendly

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are 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.
The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
Follow First Trust:  
First Trust Portfolios L.P.  Member SIPC and FINRA. (Form CRS)   •  First Trust Advisors L.P. (Form CRS)
Home |  Important Legal Information |  Privacy Policy |  California Privacy Policy |  Business Continuity Plan |  FINRA BrokerCheck
Copyright © 2024 All rights reserved.