corporations

Are We Headed Toward a Bull or Bear Market?

Tim Lemke — Mon, 15 May 2017 08:00:09 +0000

The stock market has been on a roll over the last year. Since the winter of 2016, investors have enjoyed a delightful bull market that has seen the S&P 500 index rise by more than 25 percent.

Whenever there is a lengthy run-up like this, investors always want to know how long it can last. Are we due for a big correction or even a record-breaking crash? Or will we see the markets continue to rise?

Trying to time the market's movement is a fool's game, but it's always smart to look at the various indicators that may foreshadow future performance. With the current market, there is evidence to back up both bullish and bearish predictions.

Indicators of a bull market

The good times won't end anytime soon.

Most economic indicators are strong

For the most part, the American economy is stable. Unemployment is at its lowest point in a decade. Inflation is not out of hand. Manufacturing output is up, along with consumer confidence. There are some concerns about overall growth and productivity, but nothing that spells immediate doom for American investors at this point. Generally speaking, if the underlying foundations of the economy are sound, a sudden drop in stock prices is unlikely.

Interest rates are still historically low

We've seen interest rates creep up a bit, but they are still very low by historical standards. If you're placing money in a bank account, don't expect to receive much in the way of income. Bond yields are also very low. Thus, there's a good chance we'll see people continue to invest in stocks, as they have recently offered much better returns than most other options. As long as interest rates remain low, demand for stocks will be high.

Technical analysis supports it

Many analysts and financial planners prefer to examine a technical analysis of the stock market's performance, which looks at long-term trends that have historically repeated themselves. Most observers of these trends believe we are halfway through a growth cycle that began around 2010 and will continue another five to 10 years.

Corporate earnings are good

The stock market has been known to take a dive when stock prices are high, based on the underlying earnings of companies. In other words, when stocks are overvalued, the market will eventually find out, and you'll see a big correction. Recent earnings reports suggest that the stock market growth is justified. Earnings reports for the first quarter of 2017 look to be among the best in more than five years, so there's no indication that stocks are generally overvalued as a whole.

Lawmakers are pushing pro-business policies

President Trump was elected in part because of promises to lower corporate taxes and reduce business regulations, and he has the majority support of Congress. These are policies that are generally favored by the business community, and investors have responded positively. As long as businesses remain optimistic about policy changes, the stock market will be propped up.

Indicators of a bear market

On the other hand, maybe the good times are about to end.

Companies are heavily leveraged

U.S. companies have more debt than ever, and a lot of it comes due in the next few years. Moody's Investors Services estimated that a record $2 trillion corporate debt will come due between now and 2021, and warned that the market's ability to absorb all of these maturities is "below average." Few analysts are predicting a massive wave of corporate bankruptcies, but an inability to refinance debt could curb corporate profits and cause stock prices to fall.

There's a possible epidemic of auto loan defaults

When the stock market last suffered a big crash in 2008, it was largely due to a flurry of defaults on mortgage loans. Many Americans obtained home loans that they ultimately could not afford, and ended up in foreclosure when home values dropped.

These days, it appears that there may be a similar concern facing the quantity and quality of auto loans. It may not be as big a crisis as the housing bubble, but Americans ended 2016 with a record $1.2 trillion in auto loan debt, an increase of 9 percent from the previous year. Nearly one-fourth of these outstanding auto loans are considered subprime, and the delinquency rate from these loans is at its highest in seven years. This doesn't pose the same systemic risk as the mortgage crisis, but the auto industry is a key part of the American economy.

Europe is facing uncertainty

The United Kingdom is in the process of leaving the EU. There are rumors that other countries (France?) may follow suit. There are lingering concerns over terror attacks in the region. On one hand, economic trouble in the EU may benefit U.S. companies, but many American firms operate in Europe and are impacted by geopolitical uncertainty anywhere.

Political concerns

President Trump and members of Congress have been pushing pro-business policies, but eventually, they will have to deliver the goods. Their struggles in passing a repeal of the Affordable Care Act has been viewed as a sign that they may not have the wherewithal to accomplish big things, such as tax reform. A failure to follow through on any of these major promises could eventually cause a pullback in the markets.

This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Retirement: Not Just for People?

Philip Brewer — Tue, 18 Sep 2012 10:00:43 +0000

This has always been true — almost all the economic value of a typical household is the future value of its members' labor.

With a little foresight, this will change over time. As your career progresses, you build up savings and investments, with the goal of replacing your income from labor with income from financial assets, preparing for some future time when you can no longer work. You accumulate other assets as well. Household goods, once purchased, continue to provide value for years or decades. If you pay off your mortgage (rather than doing a series of cash-out refinances), you eventually own a house you can live in. (See also: What It Really Costs to Own a Home)

A lot of what I've written here at Wise Bread has been to advocate for this shift. To advocate for making it early. To advocate for making it consciously.

One thing that I hadn't really thought about until recently, is that corporations have been making much the same shift.

Until around 1980, the economic value of a corporation was almost entirely the value of its productive capacity. Over the next decade or two, that changed. Instead of investing in plant and equipment, corporations found it more profitable to set up financing arms, to lend their customers the money to buy their products. During the 1990s and early 2000s, companies like General Electric and General Motors found that their money-lending businesses made much more money than their manufacturing businesses.

This had a lot of negative side effects. It led to the elimination of good manufacturing jobs, only partially offset by the creation of finance jobs. This shift, as much as off-shoring, was what eliminated six million manufacturing jobs over the past 20 years.

It also made corporations much less answerable to their customers. Before, companies either produced what people wanted to buy, or else their profits suffered. After this shift, it scarcely mattered what corporations produced, because so much of their income was investment income.

Basically, the corporations could retire.

This shift only benefits the management — they can now report reliable profits without having to actually do any work.

It might be nice if the harmful effects on workers would be enough to promote change, but I don't think that's going to happen. Fortunately, this whole thing is also a negative for shareholders — the corporate structure doesn't provide any value-add for the shareholders. (Really, it's of negative value — another layer of expense and another layer of taxation.) The shareholders would be much better off simply getting their money back and investing it themselves.

So, although the negative side effects are large, I don't think they're permanent. I foresee an end to the days of retired corporations. If you own stock in such a corporation, you might consider whether your money would be better off in a company that actually does or makes something.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Actually, the Rich Don’t Create Jobs. Demand Does

Paul Michael — Fri, 12 Aug 2011 14:21:17 +0000

We've heard an awful lot of back and forth recently over the dreaded tax hikes for the richest Americans, and the general argument against it has been this one:

"Don't tax the rich, they create the jobs!"

Really? I think it's fair to say that the rich control the jobs, but do they create them? Well, kind of, but only if those jobs are needed. And that need is determined by the very people who have all the money, not by the people desperate for jobs. These are the same people that are laying off workers when their businesses record profits. (We'll get to that in a moment.) Apple, Target, or even a local small business like Joe's Plumbing — they will hire people if they need them, not because they have more money to do so. And why do they hire people anyway? To make money. If the goal is making money, it can be done through expansion and employment, or it can be done through cutbacks and layoffs. The latter is king these days. (See also: Laid Off? You May Have to FIght for Unemployment Benefits)

It's classic misdirection, and fear mongering, to say that tax hikes on the ultra wealthy will lead to massive unemployment and fewer jobs. These tax cuts for the rich have been in place now for over a decade, and America is in one enormous pickle, so how do the two align? Where are all the jobs, if these tax cuts are the answer?

In fact, history has shown that when the rich pay more taxes, there are more jobs. Just look back at those years when the top marginal tax rate was above 90%. You'll see that the average annual growth in total payroll employment was 2%. When that top rate is reduced to 35% or less, the average growth falls to 0.4%.

Note: The chart comes from ThinkProgress, which is definitely a left-wing website, but the numbers are historically accurate and come from the Bureau of Labor Statistics and the Tax Policy Center.

More Money Does Not Mean More Jobs

Here are some recent examples. HSBC and Merck both recently announced strong financials. HSBC posted a 35% profit increase, around $11.5 billion, for the first half of the year. Merck's profits are solid and growing. And yet, HSBC has announced that 25,000 jobs will be eliminated between now and 2013, and Merck is laying off 13,000 people. Lockheed Martin will be trimming thousands of jobs, too.

If the arguments for the wealthy tax breaks stand up, then these profits would equate to more jobs, not job cuts. But that's not the way the world works, at least not in businesses that have to report to share holders. And in many of these big corporations, the everyday workers are faceless numbers. They are just statistics. And when you eliminate their jobs, and the stock jumps a quarter of a point...well, a few wealthy people become wealthier.

Greed is the New Order of Business

Say you own a business and it's making $200 million a year in pure profit, employing some 3000 workers. Now you find out that if you work some people a little harder, you can maintain current production and increase profit by cutting 750 jobs. What do you do? Put your current morality to one side and adopt the mindset of a hard-nosed business executive with stockholders to please. It's quite simple. You cut jobs and give the top brass a pay raise.

That's what is happening everywhere. Rich corporations are cutting jobs and making more money than ever. Even Fox News, who are slanted to the right, are admitting that corporations have a lot of cash in reserve; they're just not spending it. CEOs aren't saying to the board, "Listen you guys, we're making too much money. Shouldn't we hire some more people?"

No, new jobs are created when there's a need. You expand, open a new plant or new store, and add jobs when they are required. You don't hire 10 people when you can get away with 8. In fact, these days you can hire 7 because people are so scared of losing their jobs that they'll work extra hard and take less pay. That's supply and demand. Don't expect businesses to eat into their profit margins or tell the shareholders that they aren't getting as big a slice of the pie. That doesn't happen any more.

The fact is, the rich are not creating jobs. They haven't been doing it in a long time. When jobs are needed, those jobs will be filled. When jobs can be cut, they will be cut. But when profits matter more than people, we get what we have right now. High unemployment, and low taxes for the wealthy.

Editor's Note: The views shared by one writer does not reflect the views of all writers on Wise Bread. Commentary on politics, news, and other topics on this site are meant for entertainment purposes.

This article is from Paul Michael of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Musings inspired by the crappiest of films — Demolition Man.

Paul Michael — Tue, 04 Nov 2008 23:20:47 +0000

I saw that film about 15 years ago, and I remember liking it at the time. I also liked stone-washed jeans and neon t-shirts, but I have since come to my senses. However, one nugget stuck with me from the movie; one possible insight into the future that, at the time, I thought was totally impossible. But now, I’m not so sure.

If you haven’t seen the film, I applaud you. All you need to know is that Stallone is a cop from the past (i.e. the violent 90’s) who gets frozen for a crime he didn’t commit, and is unfrozen in the future to fight a bad guy (that’s the whole film right there). Austin Powers ripped off the idea a few years later, but this time it was intentionally funny.

In this non-violent utopian future, known as San Angeles, everything has become homogenized and bland. The songs playing on the radio are old TV jingles, swearing is outlawed and sex is done in virtual reality…no touching allowed. At one point in the movie, the geeks from the future get very excited when they’re told they will be dining at Taco Bell that night. Stallone’s archaic cop is confused until he is told that Taco Bell won the franchise war, and now all restaurants are Taco Bell.

That struck a chord with me, and to this day has resonated with me whenever I see another announcement of a business being bought out or bankrupted. Although it probably won’t be as extreme as the example in Demolition Man, there are signs everywhere that our choices on the high street are becoming limited. I was surprised to see how many food chains were owned by the same company. For instance, Yum! Brands owns Taco Bell, Pizza Hut, Wing Street, KFC, A&W and Long John Silver’s. And if I’m not mistaken, PepsiCo is heavily involved in that little equation.

Consider consumer electronics: Circuit City is about to go under, closing 155 of its stores. Sharper Image is dead. CompUSA is barely alive after being bought by Tiger Direct. That leaves Best Buy, Ultimate Electronics, Radio Shack and, ummm, let me think. How long before Best Buy is your only high street option?

This isn’t limited to electronics and food chains by the way. Banks are swallowing up other banks; car manufacturers are constantly merging (I wonder if we’ll all be driving a Honda one day); movie studios are “joining forces; and of course, there’s the media – Google Rupert Murdoch and you’ll see what I mean. It can’t be good to have one company running so many news outlets can it?

This is clearly an issue for anyone concerned about choice, fairness and competitive pricing (yes Ticketmaster, I’m looking right at you). And as I pointed out in a previous post on real America, this has been happening for a long time. However, now our choices aren’t just limited to bigger retailers…they’re becoming limited, period.

Will the Internet follow suit? I can certainly see larger companies out-pricing (and out-advertising) the smaller competitors, swallowing them up or putting them out of business. Buy.com and Shop.com probably won’t last much longer under the giant shadow of Amazon.com. And is there really an auction site to rival eBay?

Is there anything we can do about it? Well, I’ve always been told to vote with my dollars. I rarely give my business to Best Buy. I try and avoid fast food chains. And I will go out of my way to avoid using Ticketmaster; I’m amazed they aren’t violating the monopoly laws. After all, when you want to buy tickets online, where do you go? Where else CAN you go?

It may be a long way off, but I can see a future where we all shop, eat, live, drive, bank and fly using the same company; probably Exxon if they keep posting the profits they did this quarter. Depressing? Yep. Possible? Maybe. But on this important election day, the word hope springs to mind. And I hope the future is filled with choices, not restrictions.

Oh, and a final thought, getting back to the movie that started all of this. If you buy a new copy of Demolition Man, Taco Bell has clearly been replaced by Pizza Hut (with some questionable dubbing, too). Why? Because Yum! Brands figured Pizza Hut would be better for product placement globally. Do you see where this is going?

This article is from Paul Michael of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: