A Week of Learning
A Week of Learning
The team and I attended the Raymond James National Conference in Orlando last week. I use these weeks to learn about regulatory and technology updates to help us improve our overall efficiency and deliver a better result for our clients. It also an opportunity for me to sit and talk with our equity and fixed income strategists, and hear directly their thoughts on the markets and ask some questions that are otherwise hard to get answered over email. Therefore, I’ve decided this week to give you the overview of some of the meetings.
Equity Strategy Meetings
Overall strategists are still bullish on the equity markets in both the intermediate term and the longer term. Looking at the shorter term we’ve seen a major rally last week driven initially by the French run-offs and solidified by earnings throughout the week. The recent pull back in the prior two weeks was interesting due to several stocks in the S&P 500 index being down over 10%, however the overall index was down only 3% held up by some of the large cap companies.
There was some good back and forth on the price of the market right now. Questions from the floor were directed to what is a normal P/E, and what price are we looking to put on the market. I was surprised to learn that over the past few years a shift to growth orientated companies have moved into the indexes and as such multiples should in fact rise. I’ve always used history as a guide of what is an average P/E, however moving forward I may need to add a factor. Presently we are putting 19 times on our forecast of $130 of earnings for the S&P 500 this year and $145 for next year. 19 times is historically high; however, my reasoning’s were based on pro-growth strategies by the administration, and given what I learned about the style shift in the index, my conviction is stronger.
We discussed downside risks. Bear markets and recessions normally go hand in hand, and our strategy team state it’s hard for them to find anything that shows a reduction in GDP. In fact, we are starting to see some inflation. The first quarter they expect to come in around 1%, however although not a grand number the first quarter is seasonally slow.
This led into an interesting discussion on the amount of growth needed and what should be considered the new normal. We’ve been led to believe that “normal” growth is 4%. This figure is what I was taught going through my training and is still widely reported in the press, and as a goal from the Fed. Our strategist argued that he feels that the new normal should be between 2-2.5% moving forward. He referenced a graph showing the spending patterns of retirees, (usually less than when in peak earnings time) and showed a population chart highlighting that we are mid-way through Boomers hitting full retirement age.
Economic Update by Dr. Pippa Malmgren
Pippa served as a Policy Adviser to two US Presidents and has written books on Geopolitics. Her views have accurately predicted several political and economic moves including a Trump victory and the financial crisis. Dr. Malmgren didn’t disappoint by describing Mexico as the next booming economy. “Mexico is the New China”.
She highlighted several challenges China is facing, mainly wage pressures. She stated that today it’s 30% more expensive to hire in China than it is in Mexico. Chinese labor has increased 5 times in the last 3 years. Additionally, she highlighted quality concerns in China, while Mexico follows the US quality control levels closely.
She is very bullish on the US, pointing to the amount of innovation we are seeing in unprecedented, and this was somewhat of a concern 5-10 years ago.
Update from Washington
We listened to several speakers with their ear to the ground in Washington. It was a timely meeting given the release of a White House one page tax plan. Can’t really be called a plan, but rather a proposal. Hardly any details and created more questions than it answered. I heard around 5-6 current tax benefit programs that could be affected in the negotiation to reduce tax scales, but there was no conviction to any of them.
Summary
Overall nothing I heard over the past week makes me change any estimates I’ve already made. If anything, I’m more comfortable with them. I spent some time working with retirement experts on both Social Security strategies and tax planning, specifically related to retirement plans and individual retirement accounts. Although this doesn’t sound too exciting there are some strategies there that can assist in tax minimization.
The buy sell this week got a pop last week.
As always should you have any questions, please don’t hesitate to give us a call.
Have a great week.
Any opinions are those of Mick Graham and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Holding stocks for the long-term does not insure a profitable outcome. Investing in stocks always involves risk, including the possibility of losing one's entire investment. There is no guarantee that any statements, opinions or forecasts provided herein will prove to be correct. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James does not provide tax or legal services. Please discuss these issues with the appropriate professional. Dr. Pippa Malmgren is not affiliated with Raymond James.
