Excerpt of John Mauldin’s “Year of the Octopus, Part 1” is below:
Greetings from Hong Kong, where the locals are preparing to welcome the new year on February 16. While 2018 is the Year of the Dog on the traditional Chinese calendar, on the nontraditional Mauldin calendar we call it the Year of the Octopus. I don’t know exactly what’s coming, but I’m pretty sure it has more than four limbs.
Kotok: A Permanent Shift Upward
Swinging back to US markets, my friend David Kotok of Cumberland Advisors had some New Year’s Day thoughts on the Republican tax bill’s impact.
Once the transitional shock of yearend is absorbed, we think the tax bill will raise the valuation of US stocks. Simply put, the tax bill will generate a permanent shift upward of somewhere between $10 and $14 in the threshold of S&P 500 earnings. Once you adjust for that permanent shift, you may continue to factor in the earnings growth rate that you expect from a US economy that is going to grow at 3% instead of 2%. We believe that growth rate is likely for a couple of years.
So, S&P 500 earnings should range up to and then above $150 by the decade’s end. They will do so while the Fed is still engaged in a gradualist restoration of interest rates to something more “normal,” whatever that word means. And those earnings will occur while a repatriation effect is unleashing $1 trillion of stagnant cash in some form of robust redistribution (dividends or stock buybacks) or as productivity-enhancing capex spending. Bottom line is no recession in sight for at least a few years; and low inflation remains, so interest-rate rises will not derail the economic recovery, nor will they alter rising stock market valuations.