This is it, gang -- the halfway point for 2017. What an oddly strange year we're having. Let's take a look at where we've been, and then let's try to reach some conclusions about where we're going.
Where We've Been
We started the year with extraordinarily high hopes for inflation and economic growth. Why wouldn't we? Last fall's election left the government's executive and legislative branches Republican hands, which Wall Street perceives as more business-friendly than Democratic control.
But how were we to know that GOP members couldn't even get along with each other? Other than some deregulation, the Trump administration has been unable to make progress on policies that would unleash both economic growth and business spending.
And don't even get me started on fiscal stimulus. The most powerful stimulus around would obviously be tax reform, but that's going nowhere without healthcare reform. And that, my friends, is where we're stuck.
The stickiest sticking points to healthcare reform are: a) repealing Obamacare's 3.8% tax on investment income and b) the possibility that millions of Americans could lose insurance coverage. So, we're left in a legislative morass between an existing Obamacare that's unsustainable and Republican money-saving suggestions that seem heartless. Unfortunately, cutting taxes in a way that minimally impacts the national debt is nearly impossible without tackling healthcare first.
Beyond healthcare, you might recall that confidence surveys of all types started 2017 at or near multiyear highs and remain so today. However, the actual macro picture has become inconsistent at best as the year has worn on.
Nonetheless, the stock market has had a nice six-month run, with the S&P 500 up 8.2% during 2017's first half. However, that's mostly due to improving corporate earnings that came largely thanks to improving global economic strength. International exposure has paid off more than doing business solely within the United States, as seen in the fact the that small-business-centric Russell 2000 only added 4.3% in the first half.
Where Are Stocks Going?
History tells us that when the broad indices post decent gains over a year's first half, then the second half's prospects are very good.
For instance, the S&P 500 has an 87% historical probability to seeing second-half gains if it added 7% or more over the first six months, as it did this year. And going back more than 70 years, the S&P 500 has risen during the July-through-December period 69% of the time regardless of first-half performance.
The problem is that 2017 doesn't "smell" normal to me. After all, monetary conditions aren't normal, nor is the political climate.
Where Are Earnings Going?
It's true that consensus projections are calling for year-over-year earnings growth to come in at about 6.6% for the second quarter. Market watchers expect nine of the S&P 500's 11 sectors to show earnings gains -- led by energy stocks, of all things (thanks to some easy comparisons).
Analysts predict the techs and the financials will finish a very distant second and third in second-quarter profit growth. Still, market watchers only expect discretionary stocks and utilities to report year-over-year earnings contractions.
So, S&P 500 stocks overall seem likely to show earnings growth for a fourth consecutive quarter. However, their three-quarter streak of successively rising earnings gains looks ready to end.
Where Is the Fed Going?
It's not just the Trump administration's lack of success that we have to worry about. There's plenty to worry about on the monetary side as well.
The Federal Reserve has made clear that it wants to "normalize" monetary policy, which on the surface is a good idea. After all, few market watchers fancied the Fed's third and final tranche of quantitative easing all that much.
I loved QE3 as a trader, but as an economist I would have liked to the Fed to have moved in the normalization direction two to three years ago. That was when the U.S. economy was still throwing some quarters at us with annualized growth rates in the threes and fours in percentage terms.
But what the Fed is doing now is trying to get ahead of the next recession, even as the macro economy has struggled to show improvement across many data points. Unfortunately, our current eight-year-old expansion is getting pretty old in historic terms (even though it's still pretty immature in terms of actual economic accomplishments).
Now, I think the central bank could pull off getting the Fed Funds rate to a level that central-bank members are comfortable with. Or, they might be able to whittle down the Fed balance sheet. But to try to do both at the same time could put a "double whammy" on the U.S. economy.
It was James Rickards who said that to America out of a recession, the Fed has to cut rates by three percentage points. But it was James Grant who said that when it comes to financial crises, the Fed acts as both arsonist and fireman. Both views make sense to me.
So, What Am I Investing In?
Add it all up and as always, I'm staying diversified despite the temptation to go dramatically overweight in some directions.
Let's revisit some positions that I've written about in the past month, and then let's trek down a few new avenues. Please bear in mind that sometimes markets change direction quickly, and so do. But for now:
- I'm Still Long Walt Disney Co. (DIS - Get Report) . As I wrote last month, I wisely sold my DIS shares when the stock was trading above $115. But unfortunately, I bought DIS back at $109 and the stock closed Friday at $103.32. I've been covering my position by selling calls to lower my cost basis, and I intend to cut my stake in half with or without my shares getting called away. Still, my target price for this stock remains $112.
- I Still Like Wal-Mart Stores (WMT - Get Report) . Wal-Mart shares dipped after Amazon announced plans to buy Whole Foods Market (WFM) , which allowed me to get into WMT at the discount that I had been looking for. I've pointed out in the past that Wal-Mart seems like the one firm that could successfully challenge Amazon. My WMT target for the name is $79.25, which is where I took profits on the stock the last time I owned it
- I Still Like Southwest Airlines (LUV - Get Report) and Delta Air Lines (DAL - Get Report) . Both had very good months in June, as lower overhead and cheaper fuel agreed with them.
- I Want to Buy CSX Corp. (CSX - Get Report) . I don't currently have a railroad on my book, but I'd like to add CSX if I can get it at a discount. The name has repeatedly hit resistance at or near $55, so I'm looking for it to fall to around $52 before I initiate a position. (CSX closed Friday at $54.85.)
- I Love (Some) Banks. I love to love banks -- if they're lovable. Hanging onto Citigroup (C - Get Report) and KeyCorp (KEY - Get Report) has turned out well for me. I still have both in my portfolio, and I added Wells Fargo (WFC - Get Report) to beef up my exposure ahead of the Federal Reserves' recent release of bank stress-test results. I remain long all three stocks and they have yet to disappoint me.
- Kratos Defense (KTOS - Get Report) Is My Baby. I love this stock. I even named my dog after it. These guys have landed contract after contract lately, and the stock has performed well as a result.
- I'm Conservative on Healthcare. I'm long Pfizer (PFE - Get Report) , mostly for the dividend and the exposure to the pharma industry. I also have a speculative long on Enzo Biochem (ENZ - Get Report) due to several unresolved patent issues that could fall the company's way. That one has been a stellar performer not only for me, but for TheStreet's Stocks Under $10 portfolio, which I co-manage.
- Energy Has Been a Real 'Hiccup' for Me. I'm still long Apache (APA - Get Report) and Schlumberger (SLB - Get Report) , although I've had to trade around both of those positions to manage risk. APA is a dominant name in the Permian Basin, and it's currently benefiting from some minor support in both the oil and natural-gas space. It's a profitable firm and will be the last energy name that I give up on. As for SLB, that's the best oil-services company that I know of.
- Testing Tech Stocks. I'm using technology's recent sell-off to nibble on Lam Research (LRCX - Get Report) and Nvidia (NVDA - Get Report) at what I hope are discount prices. I also still believe in Intel INTC, but am not delusional enough to believe that's anything other than a long-term play. INTC's 3.25% dividend yield also earns the stock a place in my portfolio.
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