May 22, 2018

This is the 10th May of this bull market and I’m happy to report that both the Dow and S&P 500 are on track for their best May gains since 2009. Despite the roller-coaster news of the up-and-down status of North Korean disarmament talks, China trade talks, Iranian treaty talks, domestic probes into Russian hacking, and all the soap operas surrounding our controversial President, this market runs on corporate earnings and global economic growth, both of which are growing well enough to justify a rising market.

For the last three weeks, I have mocked what may be one of the most clueless pieces of punditry offered in recent years – that stocks are going down because earnings momentum peaked last quarter. When a car slows from 75 mph to 55 mph, it is still moving rapidly forward, despite its slowdown in momentum.

We tend to forget that a major tax bill passed last December. It focused on corporate tax reform more than on individual rates, and corporations are now showing us how these tax cuts boosted their performance:

  • Just before the tax cut passed, industry analysts were projecting S&P Earnings growth of 11.2% this year – a nice gain for sure – but now they are projecting almost twice that growth, +21.3%. Their outlook for S&P 500 earnings for all of 2018 as of May 3 is a record-high $160.14, and $175.48 (+9.6%) for 2019. By the end of 2018, markets will be looking forward to 2019 earnings, so if the S&P 500 indeed earns $175 in 2019, a modest 16 P/E implies an S&P 500 reading of 2,800 by year’s end – a modest increase from here – but a healthier market mood could command 18 P/E, which could push the S&P 500 to 3,150.
  • Revenues are also set to grow at a near-record pace. According to Ed Yardeni’s morning briefing last Monday, industry analysts covering the S&P companies have raised their full-year 2018 revenue-per-share growth rate by 3.4% since September 2017. Yardeni writes: “They now expect that revenues will be up 7.4% this year and 4.7% next year.” Analysts have raised their revenue expectations the most for growth-oriented sectors like energy and tech, which implies they see sustained global GDP growth rates

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary

  • Profit margins are also expanding. Industry analysts raised S&P profit margin estimates from 11.1% this year (and 11.7% in 2019) last December to 11.9% and 12.5%, respectively, as of May 3, according to Yardeni. If these numbers come to pass, it would be the first time in decades profit margins topped 12%.

Despite the Clear Evidence, Marxism Just Won’t Die

While I enjoy toasting the fruits of capitalist wealth production, I also see that our enemy refuses to die. This month marks (or is that Marx?) the 200th birthday of Karl Marx, whose ideas killed more people than any other person in history. The two worst mass murderers (Stalin and Mao) and the most recent (Pol Pot) were Red acolytes of the Marxist playbook. Now that Cuba’s Raul Castro has resigned, we are down to what may be the last dregs of hardline communist ideology in the pudgy face of Korea’s Kim Jong-un.

Marxism was always violent. The 1848 Communist Manifesto openly declared that their ends “can be attained only by the forcible overthrow of all existing social conditions.” After the February publication of the Manifesto (in German), there were March insurrections in Berlin which quickly spread throughout Europe. Tens of thousands were killed, but that was just a down payment on the Communist death toll.

A century ago, the newly-born Russian Communist Party executed Czar Nicholas II and his family in Yekaterinburg. Over the next 35 years, according to R.J. Rummel in his book, “Death By Government,” Lenin and Stalin murdered over 50 million of their own citizens and 60 million total. Mao Tse-Tung was next in line, killing over 35 million of his fellow Chinese. (Hitler comes in at #3, killing 20 million.)

Fifty years ago, students took over Columbia University and other U.S. campuses, and in Paris, students occupied the Sorbonne buildings, converting them into a commune, as striking workers and students took over the Paris streets. On May 24, 1968, revolutionary students seized the Paris Stock Exchange (the Bourse), raising a communist red flag over the building, and then tried to set it on fire. Students in France and America were enamored with the Communist solution to life’s problems. College students wore Che Guevara T-shirts while reading Mao’s little red book. In France, over 10 million workers went on strike:

How fitting that a French economist revived the popularity of Marxist economics five years ago. In 2013, a young (born May 7, 1971) French economist, Thomas Piketty, had the top-selling “business” book of the year, eventually selling 2.2 million copies. The title of his book, “Capital in the 21st Century,” bears a faint resemblance to Marx’s Das Kapital, and his policy prescriptions called for the radical redistribution of wealth in a coordinated international attack on the rich through high (up to 80%) income taxes and an annual 2% tax on the net worth of the rich. This, of course, would lead to slow growth and forced asset sales, driving wealth-seeking entrepreneurs to those remaining nations that refused to attack capitalists.

Piketty admitted (in his introduction) that he hadn’t left Paris much since age 25. I’d say: Get out of your ivory tower and look at the world around you. The world is an economics laboratory. Marxism in Russia and China impoverished the masses and led to the death of over 80 million citizens. By creating capitalist business zones, China created 400 million middle class citizens and lifted one billion out of poverty.

The final gasp of Marxian madness may end if North Korea follows through with their promise of non-proliferation and negotiation – and if Venezuela and Cuba come to their senses in our home hemisphere.

About The Author

Gary Alexander
SENIOR EDITOR

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. *All content of “Growth Mail” represents the opinion of Gary Alexander*

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