The Four Horsemen of the Apocalypse is a metaphor depicting the end of times in the New Testament. They describe conquest, war, hunger, and death respectively. While this analogy may not exactly map to economy and markets, it's one way to look at how good times could end.
Markets are on a roll with indexes hitting all-time highs every week (DOW has reached this milestone 53 tines in 2017). At current pace, my predictions for indexes by end of year are: DOW: 24K, S&P: 2625 and Nasdaq: 6800 (about 2-3% upside from current levels). No one would have predicted that we would see these levels 12 months back. So with this backdrop, let's look at analogy of Four Horsemen which could propel or end the good times!
Federal Reserve (FED): For world economy and markets, this institution is most powerful in world (even powerful than US Government itself). FED came to rescue during 2008 financial crisis and still helping the economy with its policy of gradual interest rate hikes. Many believe that lack of action by FED was one of the major reason for 1929 Great Depression and Bernanke avoided similar fate during 2008 by opening the vaults and very un-coventional policy gimmicks. Who would be next FED chair-person would decide how policy would evolve. Current favorite (Powell) should reassure markets that Yellen's policy would continue. New chair-person would also have to decide on pace of interest rate hikes as well as un-winding of FED balance-sheet to reasonable level.
Taxes: Last week some good news came out on this front with Senate passing budget with 51-49 (along party lines) which paves way for increasing deficits by $1.5 trillion over next decade. This means now congress can work out tax-reform details and pass it with simple majority. Despite major differences in who should get how much and hectic lobbying which is bound to happen, there is momentum building up to pass tax-reforms in next few months. I won't be surprised if congress pushes it in next few weeks and call it as "Christmas/New Year Gift" to American People. Any indications that this would fall similar to health care would be a major blow to GOP. With mid-term elections in 2018, GOP has every incentive to get it done (just for sake of self-preservation).
Earnings: Initial earnings season has been good with 75% earnings reports giving positive surprises. Next week we should expect more of these with more than 200 S&P companies reporting (AMZN, MSFT, BA, CAT and many more). Companies are reporting both top-line growth as well as expansion of margins. This should help justify high P/E ratios. There are few laggards like GE but these are exceptions. Even previous laggard IBM is showing some momentum. Next 2 months, laggards would take leadership role and help propel the market. Companies are also planning for how to use windfall coming due to repatriation at one time low-tax rate (below 10%) and reduced corporate tax rate as part of tax reforms. Both of these factors should be good for earnings in 2018.
Trump: And finally President Trump! During first 11 months of his presidency, every day has been different and full of new excitement (mostly caused due to his controversial comments/tweets). It's difficult to understand why Trump does what he does. He could have handled condolences to fallen stars, NFL national anthem controversy, Puerto Rico hurricane and many such incidents to bring America together. Instead he wasted these opportunities to change the narrative. At this time markets don't care what Trump says and does not say. However this unpredictable and divisive nature could become dangerous especially if there is major international crisis caused due to North Korea, Iran or Russia. We need President Trump to be President to all Americans and re-establish himself as respected world leader!
These four horsemen could decide if good times would continue or not!
Markets are on a roll with indexes hitting all-time highs every week (DOW has reached this milestone 53 tines in 2017). At current pace, my predictions for indexes by end of year are: DOW: 24K, S&P: 2625 and Nasdaq: 6800 (about 2-3% upside from current levels). No one would have predicted that we would see these levels 12 months back. So with this backdrop, let's look at analogy of Four Horsemen which could propel or end the good times!
Federal Reserve (FED): For world economy and markets, this institution is most powerful in world (even powerful than US Government itself). FED came to rescue during 2008 financial crisis and still helping the economy with its policy of gradual interest rate hikes. Many believe that lack of action by FED was one of the major reason for 1929 Great Depression and Bernanke avoided similar fate during 2008 by opening the vaults and very un-coventional policy gimmicks. Who would be next FED chair-person would decide how policy would evolve. Current favorite (Powell) should reassure markets that Yellen's policy would continue. New chair-person would also have to decide on pace of interest rate hikes as well as un-winding of FED balance-sheet to reasonable level.
Taxes: Last week some good news came out on this front with Senate passing budget with 51-49 (along party lines) which paves way for increasing deficits by $1.5 trillion over next decade. This means now congress can work out tax-reform details and pass it with simple majority. Despite major differences in who should get how much and hectic lobbying which is bound to happen, there is momentum building up to pass tax-reforms in next few months. I won't be surprised if congress pushes it in next few weeks and call it as "Christmas/New Year Gift" to American People. Any indications that this would fall similar to health care would be a major blow to GOP. With mid-term elections in 2018, GOP has every incentive to get it done (just for sake of self-preservation).
Earnings: Initial earnings season has been good with 75% earnings reports giving positive surprises. Next week we should expect more of these with more than 200 S&P companies reporting (AMZN, MSFT, BA, CAT and many more). Companies are reporting both top-line growth as well as expansion of margins. This should help justify high P/E ratios. There are few laggards like GE but these are exceptions. Even previous laggard IBM is showing some momentum. Next 2 months, laggards would take leadership role and help propel the market. Companies are also planning for how to use windfall coming due to repatriation at one time low-tax rate (below 10%) and reduced corporate tax rate as part of tax reforms. Both of these factors should be good for earnings in 2018.
Trump: And finally President Trump! During first 11 months of his presidency, every day has been different and full of new excitement (mostly caused due to his controversial comments/tweets). It's difficult to understand why Trump does what he does. He could have handled condolences to fallen stars, NFL national anthem controversy, Puerto Rico hurricane and many such incidents to bring America together. Instead he wasted these opportunities to change the narrative. At this time markets don't care what Trump says and does not say. However this unpredictable and divisive nature could become dangerous especially if there is major international crisis caused due to North Korea, Iran or Russia. We need President Trump to be President to all Americans and re-establish himself as respected world leader!
These four horsemen could decide if good times would continue or not!
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