Equity Fundamentals

What I often hear from the traders and amateur investors is that the fundamentals are great for stocks.  I don't hear much about valuations or tightening monetary conditions anymore.  Its funny.  There was a bigger fuss about stocks being overvalued back in 2014 and 2015 than there is now.  It is almost as if the corporate tax cut somehow made the long term prospects of US corporations that much better.  But let's not forget that stocks are priced off of a perpetual cash flow.  There is no guarantee that corporate taxes will remain at this level forever.  With the giant budget deficit, and the likelihood of future populist policies, an increase in the corporate tax rate is definitely not out of the question.  It would not be surprising to see the Democrats nominate a populist candidate due to the failure of Hilary Clinton and the moderates. 

It has been big corporations that have mostly benefited over the past 9 year bull market, as low wage growth and less competition has helped raised profit margins.  I realize the masses are mostly ignorant of what is really going on in the economy, how Congress is bought and paid for by corporate lobbyists to siphon federal dollars to the big corporations.  But the 98% in the lower to middle class probably realize that the rising stock market is not really helping them, as their situation is not getting any better, while the rich, who own most of the financial assets, have been getting much richer. 

The only way for the world economy to get much stronger is to transfer wealth from the rich to the poor and middle class.  The rich spend a much smaller portion of their wealth than the poor and middle class, thus reducing consumption and keeping the economy growing slowly.  Inequality is a big factor in holding back economic growth. 

Corporations have not been investing in future growth, because they realize they can get more bang for their buck by buying back stock, rather than investing.  Investments only pay off if there are a growing number of consumers who are looking to spend.  But the consumer is cash strapped, because of low wage growth and inflation that is underreported by the government.  Also, the lower population growth rates and an aging population in developed countries reduce overall consumer demand. 

Tax cuts are providing a short term boost, but most of the benefits are going to the rich, so it won't be a game changer.  And with higher interest rates, the interest burden has increased, offsetting much of the fiscal stimulus. 

To sum it up, I don't agree that equities fundamentals are great, or even good.  It looks similar to 2000, without the strong growth.  The price/book, price/sales, and price to cyclically adjusted earnings are the highest since the 2000 bubble.  It is an environment ripe for a bear market.  That is probably why I was too eager to sell last week at 2680  when I should have at least waited a few days to see how far the bulls could take it higher.  Sometimes it is better to wait to sell, even if stocks reach your price target, just because uptrends usually don't end after 4 trading days, which was how long the rally was when I sold. 

Anyway, that is history.  I can only trade the current market, and with the SPX at 2740, it is getting much closer to ideal long term short levels.  Thinking 2780-2800 zone is an area to consider shorting for a move back to 2600.  The drop back to 2600 won't happen right away, but there is a good chance it happens by July/August.  Right now, the momentum is too strong and the uptrend off the May 3 low is still too young for a good short signal.