Running Hot

By Colin Twiggs
January 19, 2017 11:00 p.m. EDT (3:00 p.m. AEST)

Please read the Disclaimer.

We are in stage 3 (the final stage) of a bull market. The up-trend on the S&P 500 and the Dow is accelerating, with corrections of shorter and shorter duration. Trend Index troughs high above zero signal strong buying pressure.

S&P 500

Growth estimates remain modest, with real GDP forecast to grow at 1.7% for the year ended December 2017. There has been no significant up-turn in employment, or hours worked, but that could change as the benefits of tax relief flow through the economy.

Real GDP Growth Estimate

PEMax at December 2017 was 24.13 for the S&P 500. At Friday's close of 2810.10 this had climbed to 25.36, the second-highest peak in the last 100 years.

S&P 500 PE Max

PEMax is unaffected by one-off tax charges in Q4 of 2017 which caused a 14.7% or $39.9 billion fall in earnings estimates according to Standard & Poors.

Profits are unlikely to grow at a faster rate than GDP in the long-term. But earnings per share, and therefore stocks, are capable of outperforming for as long as buybacks continue. Corporations have so far been undeterred from buying back stocks despite high valuations but that is likely to fade as earnings multiples rise.

The Federal Reserve, as one writer put it, after the recent increase in the discount rate, is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.

~ by William McChesney Martin Jr., Fed Chairman (1951-1970).


Colin Twiggs is director of The Patient Investor Pty Ltd, an Authorised Representative (no. 1256439) of MoneySherpa Pty Limited which holds Australian Financial Services Licence No. 451289.

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