The Gloom Encroaching on Trump’s Stock Boom - http://earlyretireonline.com | how to earn money fast

October 11, 2018 11:41 pm
Categorised in:

This could be seen in the stock market’s stretched valuations. Earlier this year, the S.&.P 500’s price-to-earnings ratio, a yardstick that compares stock prices to past earnings, hit its highest level in over 15 years. But investors kept buying stocks in the expectation that the strong earnings growth would continue. Much of the growth this year came from the tax cuts enacted at the end of 2017. As a result, investors expect slower earnings growth in 2019.

Not even Mr. Trump’s hard-edge trade policies could shake investor faith in stocks. After the Trump administration forged a trade truce with the European Union over the summer, Wall Street seemed to grow comfortable with the trade war, and stocks resumed their climb.

But in recent weeks, investors became newly worried about the trade tensions with China, which the United States has targeted with tariffs on $250 billion of its goods. The battle could now have an outsize effect on the stock market. Technology companies, whose stocks have risen strongly, may be among those most harmed. The tariffs along with China’s retaliatory measures make it harder for them to operate and expand their finely honed supply chains.

Investors have also grown concerned about the Federal Reserve. For much of the year, they seemed to believe that the central bank would continue to gradually raise interest rates without significantly slowing the economy and disrupting financial markets. But with a strong United States economy, it’s not clear when the Fed will stop raising interest rates.

The growing fiscal deficit illustrates how investors suddenly had to grapple with the flip side of a policy — Mr. Trump’s tax cuts — that they had favored. The lower taxes immediately bolstered companies’ bottom lines, but the federal government’s revenues fell short, forcing the government to sell more debt. The interest payments on Treasury securities are now higher than they were during the Great Recession.

In any sell-off, it’s important to keep things in perspective. Even after the past week’s drop, the S.&P. 500 is still up 2 percent this year. Retail investors appear to be well ahead. Households’ holdings of mutual funds have risen by $1.9 trillion since the third quarter of 2016, according to figures from the Federal Reserve.

Long-term rallies in stocks are often punctuated with corrections, or declines of 10 percent or more from their most recent high. If another occurred this year, the S.&P. 500 would be down only 1 percent this year. Investors can most likely stomach that. The Fed can always choose to hold off on raising interest rates.


Related Posts