Is there Russian interference?

The seemingly widening question of Russian influence in the 2016 Presidential Election and in the current Trump administration has gripped the headlines and placed a new concern as to the continuation of the bull market. 

It is hard to predict where the investigations will lead.  However, I don’t believe that even if impeachment lies at the end of a long investigation, the bull market is likely to end. 

Impeachment might cause a correction but not a bear market.  If President Trump is removed, Vice-President Pence would succeed him.  Politically Pence holds the same policies of tax cuts and possible infrastructure spending. 

Even if the President and Vice-President were forced to resign, pro-business Paul Ryan, The Speaker of the House of Representatives would become President.   The market would still get a pro-business President and at least until the 2018 Mid-Term Elections, a pro-business Republican Congress. 

Economic news continues positive

Aside from politics, the economic news continues to come in positive. 

Manufacturing, consumer sentiment, and employment all are registering solid numbers.

Europe seems to be improving,

China is hanging in there and emerging markets seem to be growing. 

Against this backdrop, without a recession or financial crisis, it’s hard to conclude a bear market is imminent. 

I have been writing that it is likely that we get a correction this year.  We seem to experience one each year.  With the political issues brewing, the probability of a correction has increased.

At 17.5 times earnings, the market is not cheap. This explains why those companies that missed first-quarter earnings estimates fell significantly more than the rise in stock prices of firms that beat their estimates. 

The good news is that more companies beat their earnings estimates than average.  Earnings growth was the highest since the 3rd quarter 2011. 

Over the long-term, profits drive stock prices. When stocks trade at the multiples they currently trade, earnings need to continue to come in strong to support the price levels. It’s a difficult treadmill and caution is warranted.

Looking at the earnings reports, the companies that had global exposure had better earnings growth than domestic, US-focused firms. 

With the rebound in oil prices, energy firms were the biggest contributors to the overall earnings growth. 

Given the back-drop of high price-to-earnings ratios and good earnings growth, there is even more reason to look for value.  Screening investments for those companies with lower than average P/E ratios and earnings growth rates that are average to above-average can provide some cushion should the markets correct. 

It will be interesting to watch how the OPEC and Russia oil production talks proceed and whether it will lead to an extension of the existing cuts. 

Saudi Arabia has a significant interest to move oil prices higher as the country seeks to sell 5% of its national oil company to the public.

— Ian Green, Pendragon Capital Management

Subscribe to Pendragon's Newsletter

Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.