As you can tell from the title, this quarterly opinion letter should be the “fluff” part of your ad hoc reading list. Otherwise, buyer beware.
Last quarter we talked about the “Trump bump” and I’m delighted that most of the U.S. equity gains have remained and the larger growth stocks have risen to match the “bump” seen by smaller value companies last quarter. Now the current price-to-earnings ratios (“P/E”) as a percentage of the 15-year average P/E range from 112.5% to 123.6% (see “Returns and Valuations by Style”). In short, everything is overpriced now.
The next six months in the U.S. stock market look rocky as the new administration struggles to fulfill their campaign “promises” and we try to sort fact from fiction daily. The consensus is that any change is going to take longer than expected and obfuscation is the norm. On the positive side of the ledger, consumer confidence is high, and Americans are hard-working and hopeful. Confidence is a lagging indicator but I’m still part of the hopeful bunch.
On a drearier topic, the growth in the working-age population (see “Long-term drivers of economic growth”) is a topic of concern. You should not hear Americans complain that an illegal immigrant stole their job because the labor force isn’t growing fast enough to fill the current jobs and growth is projected to drop by another 50% in the next decade. What does that mean for our GDP? Not good. If there is no growth in workers we are all going to have to be a bit more productive. That might push me out of the hopeful bunch.
Yet there is a drearier topic (see “Federal finances”). The Congressional Budget Office forecast an increase in the Federal net debt from 77.5% to 88.9% by 2027 due, mostly, to our aging population. “In particular, spending as a share of GDP increases for Social Security, the major health care programs (primarily Medicare), and interest on the government’s debt.”1
At this point you must wonder who is going to build the wall and pay for it. Perhaps the millennials will move out of the basement, build it, and pay for it. Go Texas, Arizona, California, and New Mexico. There is lots of potential population growth in the border towns. It’s going to be bigly.
Then there is one topic that doesn’t show up in the charts that I’ll end with. Love. We don’t measure it, nor its impact, but we know it exists.
In Paul’s words. “4 Love is patient, love is kind and is not jealous; love does not brag and is not arrogant, 5 does not act unbecomingly; it does not seek its own, is not provoked, does not take into account a wrong suffered, 6 does not rejoice in unrighteousness, but rejoices with the truth; 7 bears all things, believes all things, hopes all things, endures all things.”2
Love does, in fact, endure all things and that keeps me in the hopeful bunch.
2 I Corinthians 13:4-7 (New American Standard Bible)
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