For the first time in ages, the US economy is pretty straightforward to analyze. The US stock market, on the other hand, has many more twists and turns than usual. Happily for me, the economy is today’s topic.
all macroeconomic plusses
From a strictly macroeconomic view, it’s all plusses:
–the economy is at full employment
–the US is growing at close to its long-term potential of 2% a year. It may have a somewhat faster spurt in 2017
–inflation is under control
–consumer spending is strong
–business capital spending is beginning to accelerate
–corporate tax reform may make domestic-oriented businesses more profitable
–badly needed infrastructure spending, blocked by Republicans because Mr. Obama was in office, will likely be begun once Mr. Trump is inaugurated. While this may not seem fair, it’s reality
–having expansionary fiscal policy in play will allow the Fed to raise interest rates faster than it otherwise would (even the most ardent supporters of the primacy of monetary policy were beginning to realize that eight years in interest-rate intensive care is not healthy)
–the US$ is rising; demand for government debt–which offers foreigners an above average yield + the possibility of currency gain–is strong. Demand from American citizens will likely improve as coupon yields rise.
broad stock market implications
To sum up, the US economy will likely expand in 2017 by, let’s say, 2.5% – 3.0%. Add in 2% inflation and the result is, on the high side, 5% nominal growth. If we observe that the S&P 500 contains the best and brightest of the US, earnings for the S&P could rise by 10% in 2017. The absolute earnings number could also get a big one-time boost from a lowering of the corporate tax rate.
tax reform earnings gains: how big?
My back-of-the-envelope guess: half the net earnings of the S&P come from the US. Let’s hypothesize (i.e., make up a number) that half of that figure is fully taxed.
(An aside: if I were still working, I’d either ask a junior person to go through a database–or 500 annual reports–and figure the number out or call a brokerage house that surely has already done the grunt work.)
Let’s also say that the top Federal tax rate is also cut in half. This would imply something like a 12.5% boost to the level of S&P 500 earnings from the fully taxed half + probably a much smaller number from the other half. Even if this doesn’t turn out to be uncannily accurate, we can assume that the boost to earnings could be more than 10% and less than 20%. So +15% sounds good to me.
One complication: oil. Accounting for natural resources is weird, and hard to figure from the outside, no matter what the circumstances.
Oil exploration operations may decide to have throw in the kitchen sink-style writeoffs of projects that are unprofitable at current oil prices. It’s certainly what I’d do. That might make 2016 income statements for the oils as ugly as 2015 ones were. But, with potential losses jettisoned, 2017 numbers would likely turn out to be surprisingly good.