Why isn't the stock market doing worse than it is? Why aren't stocks cratering when there's a bunch of rate hikes coming, stocks have gone incredibly far and we have a special prosecutor on the loose who the president seems convinced is working to get him? Plus we just avoided a government shutdown, the kind of thing we thought was in our past.
These are not easy questions. I talk to far more people who want to get out rather than get in, people who genuinely believe we are being led over a cliff and that we are simply oblivious to how bad things are.
We can start with what we call the top down: employment. When you have robust employment many good things can occur. Homes get bought or fixed up. Cars get purchased. Devices, including expensive Apple iPhones, get purchased. People with jobs are a heck of a lot more confident than those who don't have them. As long as raises don't spike too much and there are still plenty of people looking for work and finding it, we can bet that future numbers can improve.
Second we so often overlook where the jobs are being created. The manufacturing sector was more robust than I can ever recall which is because we have abundant natural resources that we tend to take for granted or not to think about. No other industrialized country with the exception, perhaps, of Russia, continues to find more oil and gas and get it to the markets that need it. If fact we have an oddity that is pretty extraordinary: we have far more energy, including renewable energy, than we can use. We are now producing about ten million barrels a day, a record, something that wasn't supposed to happen if OPEC drove the price down. It was a failed strategy as we are now a prime exporter of crude and gasoline and even liquefied natural gas. That's changed so much. We now not only benefit from being a low cost producer for many products, because of low natural gas prices in particular, but our oil companies are more flush than they used to be at these prices. Drilling costs have come way down, yet oil's being found with far fewer rigs. That's why, by the way, the rig count and the oil inventories don't really matter anymore. We are getting much more out of a rig and what does storage matter if we are shipping oil at record pace. The main thrust of this aspect of why we aren't falling off a cliff is that jobs are being distributed more broadly and in places that had been fallow.
Why this isn't talked about beats me. It is part of the industrial renaissance that is going on and while it is difficult to keep companies here for $26 an hour versus $5 an hour in Mexico and free health care, to some degree the president's suasion is working.
How much of the increase is the tax code change? I think it is pretty huge. I have now interviewed a host of high tax paying companies like Boeing and they intend to return some of that money to shareholders in the form of dividends and buybacks -- why not, they are public companies. But they also intend to hire and innovate with the money. They have far more plane orders than they can handle and they need that money to make them. How is that not a positive story?
Speaking of aerospace, this industry is another reason why you can pick at stocks when they are down, particularly the industrials. There are only a handful of companies directly involved with aerospace, Honeywell (HON) , United Technologies (UTX) and Boeing (BA) stand out. There are only a handful that are involved in military and aerospace, now we are talking General Dynamics (GD) , Northrop Grumman (NOC) , Lockheed Martin (LMT) and Raytheon (RTN) .
These are bigger industries than many give them credit for. There's so much business coming from these industries that they alone can be responsible for some of the strength in the economy that seems more durable than people believe. They are why so many industrials immediately rebound including those only partially involved in aerospace like Eaton ETN or Parker Hannifin (PH) or PPG (PPG) or Arconic (ARNC) . We've always been conditioned to only two cycles, autos and housing. We need to add a third, but it is secular in its growth: aerospace and defense.
I think something Chief Economic Advisor Gary Cohn said the other day that truly resonates with the business community and is spurring jobs: deregulation. As a small businessman I am always conscious of the layers of regulations that make it seemingly to impossible to compete with big business. I am also conscious of the fact that since President Trump it's not been the federal government that is responsible for most of the regulations. Small business people live in fear of the federal government because they know that only federal and state governments can close their operations for violating laws. It is true that very few highly visible laws have been rolled back, but lots of regulations have and surprisingly few have been promulgated. This is a sticky point because you may believe that the regulations that are being rolled back shouldn't be. But that's usually because you don't own a business.
I think that banks are certainly feeling this. Banks have, since the Great Recession, lived in fear of losses and what the regulators would say. But a bank that takes no chances on anyone less than totally credit-worthy is a bank that we normally would think isn't doing its job. Only people who don't need loans aren't at risk of defaulting. If a bank doesn't take risks and the government makes a lot of rules, the notion of expanding takes a lot of guts, more than most people either have or can afford to have. If loans are easier to come by then, yes, there will be more loan losses, but if there were no such thing as loan losses we might as well just let the very very rich get a loan. This change, plus the coming rate hikes, have given hope that bank stocks can, once again, be viewed as fairly conservative growth stocks rather than just down and dirty value traps. One look at Citigroup (C) tells all. A week ago we learned that it was going to have to take a $20 billion loss. The stock is now a point below its high because we realize that the loss comes from bookkeeping -- it is what happens when you cut taxes and your losses therefore aren't worth as much.
Finally we are having some amazing comebacks that I didn't think was possible. Many thought that when Bill Ackman, the hedge fund manager, bailed from his huge Valeant (VRX) position at around $11 it must be all over. Well it might have been all over for Ackman but now the stock just took out $20.
We thought that outfits like Abercrombie and Fitch (ANF) or American Eagle Outfitters or even Gap and LBrands were in some sort of perma-spiral down, but it didn't happen. No the mall's not teaming with people but it sure doesn't seem all that dead either. And if you really had any doubt consider how well Costco, Childrens Place and Home Depot and Walmart are doing. Or the comebacks in the stocks of Macy's and Kohl's.
It's just very hard to keep stocks down in this environment.
Now last week I presented a list of worries that I am always concerned about but I think the reasons why the market hangs up here and doesn't plunge really do matter because they are at the heart and soul of what I would call the inability to have a sustained decline for almost the entire year of 2017. And the clock is ticking on this year to have one.
