Top 5 Reasons Why Caissa feels This Market has Room to Run
Written by Kelly S. Olson Pedersen, CFP®, CDFA
GDP (GROSS DOMESTIC PRODUCT)
- Has accelerated to 3% from 1.5% in 2016
- The acceleration is not factored into forward P/E ratios but will likely decrease them
- Potential repatriation of Apple cash alone could boost GDP 1-1.5% if funds are deployed
Downside: We need companies to put the cash on their balance sheet to work to sustain 3% GDP and more to attain the goal of 4% GDP.
3RD QUARTER 2017 EQUITY EARNINGS
- They are looking to be provide strong results across the broad market
- Potential future tax cuts for corporate could boost earnings bottom line immediately
- Synchronized global growth is accelerating. The past few year’s market returns have mostly been driven by US equities. International equities are no longer a drag and are actually propelling more US growth
Downside: Unless we boost GDP and change the dynamics of investing cash to produce more/sell more, we will not be able to sustain great earnings on a quarterly basis in the mid to long-term.
- Consumer confidence is high. Household debt is at its lowest level since 1980 and household net worth has almost doubled since 2008.
- Potential future tax cuts could pass through more after tax dollars through small businesses and personal tax returns that would become available for personal expenditure.
- Personal consumption supports about 70% of our GDP
Downside: If people decide to halt spending and instead save more money, the economy will slow.
- Inflation is at 1.7% and rising.
- We are all but certain to get an interest rate hike in the 4th
- In the near term, wage inflation is a positive driver of the economy as people have more money in their back pocket to spend.
Downside: Inflation will also be the death of this rally in the future
POTENTIAL TAX BILL
- Repatriation of cash: Apple alone has about $264 Billion overseas. If all of their cash was brought back to the US, a $17 Trillion economy, GDP could have and instant bump of about 1-1.5%
- Pass through tax rates to small business owners could lowered for those with pass through incomes to their personal returns. Small business owners make up the largest part of the economy
- Fewer and potentially lower brackets and repeal of AMT for individuals
- Swapping some itemized deductions for a much higher standard deduction
- Immediate deduction of capital expenditures for corporations – companies will start to put that 30% cash to work!!
- Lower corporate tax rates: hiring more people, immediate bottom line increase, boost of output to GDP.
Downside: Eventually the cuts will need to pay for themselves IF GDP can’t sustain them in production of the US economy
Broad market has room to run but this will be a stock pickers market. A number of names and sectors are quite overvalued and not growing fast enough to warrant owning. We are overweight growth vs value and favor sectors like biotech, financials and technology (basically anything in the spread business). Throughout the year we’ve been taking profits and reallocating to International equities and lately into alternatives/hedges in part.