A Word from Jeff: Whither Now, Venerable Bull?

Of course, venerable can be just a nice way of saying very old, and this decade-long bull is getting mighty long in the tooth, indeed. The big question is how likely is this old fellow to continue to wander up the hill, before heading over it?

The world has become a much more interesting place in the past 6 months, mostly stemming from actions of the Trump-led US Government. Massive tax relief for corporations and individuals has goosed the US economy to growth levels not seen – or dreamed of – in years, with plenty of blue sky seemingly ahead. Adding fascination to interest, the foreign policy landscape has been reformed almost beyond recognition, with Korea, tariffs poker (some would say roulette), and the G-7 drama as only the leading of many bulldozers. Risks seem to abound, with an Asian military meltdown and a protectionist global trade freeze leading the list of the most profound fears, to say nothing of renewed fears of a North Korean nuclear attack on Guam, Japan, Hawaii, or the US mainland. So far Mr. Trump’s Singapore Sling has had a calming effect, but the future – and his actions – are far from certain.

Curious that the markets have largely reacted – so far as early June – with a relative sigh. This is fairly astonishing with:

  1. The possibility of devastating global war and near-certain restructuring of the economic and military alignment of east Asia, with grave impact to Japan, South Korea, China, and the US, and;
  2. Economic saber rattling circling the globe at an elevated pitch, with the specter of barriered trade stifling the prosperities of virtually every important economy. Rumblings of trade war with Canada, China, Japan, Germany, the UK, France, Mexico and countless others have been booming for many weeks, with no signs of a new deal in the offing. If tariffs and other barriers really hit, profits, incomes and markets will plunge, if not crash, and we’ll all be poorer, everyone.

Interesting times, for sure. So why does the market seem so complacent?

The easy answer is the collective wisdom of the market – many millions of humans with many billions of skin in the game – believe the probability of bad outcomes to be very low, and the probability of good outcomes much higher. Good outcomes include a North Korean solution that promotes regional stability and prosperity, and new global trade deals that reinvigorate the world’s economies and drive the US to an economic vibrancy not seen perhaps in half a century.

I am in this camp. While the Trump Doctrine seems a singular disjointed jumble of spontaneous disruption, there is a very good chance of a profound method to the madness. His mantra of “making America great again” implies a required sea change in the world economic order to come to pass. The US remains the 600lb economic gorilla in the world, with enormous coercive power to assert its own agenda, should it choose. Many believe it has not for a long, long time, perhaps in the belief that we are so strong we can leave money on the table and still remain quite rich. And there is much truth in that statement. On the other hand, if we choose to wield every card and tool at our disposal to truly focus on America’s interests first, the US economic miracle may ignite anew, with truly spectacular consequences. It seems that Trump so chooses, and regardless of where you stand on that stance, you stand to profit if he pulls it off. The markets – particularly the US markets – seem to be pricing in a very good chance that this will happen, regardless of the aftermath of Trump’s Singapore fling.

So whither now the bull? As probable as is the

market belief that Trump may pull off peace and prosperity, there is no question that he is playing with fire and embracing profound risk on many fronts. Things could go far wrong, and collapse into a bear market, though I think the odds of this are low. More likely, the market will sense – rightly or wrongly – the appearance of failure, and suffer many inevitable bumps and plunges. This has been the pattern for much of 2018 – much of history really –  and I expect this will continue, and even get worse, as we wind through 2018.

All this considered, my forecast here in mid-2018 is for increased volatility, but also a resurgent bull market, particularly in the US. The combination of tax cuts and a reformed world trading stage could – I think will – shove the US economy into an overdrive not seen since the 1990’s at least, and propel corporate profits – and stock prices – higher and longer than I believed a year ago. The old bull has a new lease on life, as it were. While it is important to maintain diversification in non-US issues, which we still believe to be quite undervalued, US shares could have an even longer to way to go. The caveat, of course, is that US stocks are still richly valued by many measures, so careful buying of quality issues at bargain prices – still possible if one is careful – is paramount.

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