- By Wade W. Slome, CFA, CFP
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (April 3, 2017). Subscribe on the right side of the page for the complete text.
Having children is great, but a disadvantage to having younger kids are the April Fool's jokes they like to play on parents. Fortunately, this year was fairly benign as I only suffered a nail-polish covered bar of soap in the shower. However, what has not been a joke has been the serious series of new record highs achieved in the stock market. While it is true the S&P 500 index finished roughly flat for the month (-0.0%) after hitting new highs earlier in March, the technology-laden NASDAQ index continued its dominating run, advancing +1.5% in March contributing to the impressive +10% jump in the first quarter. For 2017, the NASDAQ supremacy has been aided by the stalwart gains realized by leaders like Apple Inc. (up +24%), Facebook Inc. (up +23%), and Amazon.com Inc. (up +18%). The surprising fact to many is that these records have come in the face of immense political turmoil - most recently President Trump's failure to deliver on a campaign promise to repeal and replace the Obamacare healthcare system.
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- SPY 15-Year Financial Data
- The intrinsic value of SPY
- Peter Lynch Chart of SPY
Like a broken record, I've repeated there are much more important factors impacting investment portfolios and the stock market other than politics (see also Politics Schmolitics ). In fact, many casual observers of the stock market don't realize we have been in the midst of a synchronized, global economic expansion, helped in part by the stabilization in the value of the U.S. dollar over the last couple of years.
As you can see above, there was an approximate +25% appreciation in the value of the dollar in late-2014, early-2015. This spike in the value of the dollar suddenly made U.S. goods sold abroad +25% more expensive, resulting in U.S. multinational companies experiencing a dramatic profitability squeeze over a short period of time. The good news is that over the last two years the dollar has stabilized around an index value of 100. What does this mean? In short, this has provided U.S. multinational companies time to adjust operations, thereby neutralizing the currency headwinds and allowing the companies to return to profitability growth.
Source: Calafia Beach Pundit
And profits are back on the rise indeed. The six decade long chart above shows there is a significant correlation between the stock market (red line - S&P 500) and corporate profits (blue line). The skeptics and naysayers have been out in full force ever since the 2008-2009 financial crisis - I profiled these so-called "sideliners" in Get out of Stocks! .
As the stock market continues to hit new record highs, the doubters continue to scream danger. There will always be volatility, but when the richest investor of all-time, Warren Buffett (Trades, Portfolio), continues to say that stocks are still attractively priced, given the current interest rate environment , that goes a long way to assuage investor concerns.
Politically, a lot could still go wrong as it relates to healthcare, tax reform, and infrastructure spending, to name a few issues. However, it's still early, and it's possible positive surprises could also occur. More importantly, as I've noted before, corporate profits, interest rates, valuations, and investor sentiment are much more important factors than politics, and on balance these factors are on the favorable side of the ledger. These factors will have a larger impact on the long-term direction of stock prices.
With approval ratings of Congress and the President at low levels, investors have had trouble finding humor in politics, even on April Fool's Day. Another significant factor more important than politics is the issue of retirement savings by Americans, which is no joke. As you finalize your tax returns in the coming weeks, it behooves you to revisit your retirement plan and investment portfolio. Inefficiently investing your money or outliving your savings is no laughing matter. I'll continue with my disciplined financial plan and leave the laughing to my kids, as they enjoy planning their next April Fool's Day prank.
This article first appeared on GuruFocus.