May 30, 2018

“And ye shall hear of wars and rumors of wars: See that ye be not troubled: for all these things must come to pass, but the end is not yet.” – Matthew 24:6

Sports heroes dominated the stage on Sunday, as an Australian with the unlikely name of Will Power won the Indianapolis 500, and then Cleveland’s LeBron James used his own brand of Will Power to dominate the younger, home-standing Boston Celtics to advance to the NBA Finals for his 8th consecutive season.

On Monday, however, the real American heroes dominated our memories. For my part, on my weekly radio program, I honored the vets by playing a dozen songs with a form of “Memories” in the title, from “Memories of You” to the classic Four Lads hit, “(We’ll Have These) Moments to Remember.” But the most poignant Memorial Day song was written by immigrants Harry Warren (born Salvatore Guaragna) and Al Dubin, for World War I vets who were denied a promised bonus and marched on Washington. In a 1933 Busby Berkeley movie spectacular, dozens of these forgotten vets marched as Joan Blondell sang:

On Memorial Day, we remember our fallen warriors. This year also marks the centennial of the 1918 Armistice that was to mark the “war to end all wars.” It didn’t work out that way, but something almost like that happened at the end of World War II. The frequency of large wars died down dramatically. We have seen far fewer large-scale wars and a blessedly huge drop-off in deaths from global wars since then.

These charts give the overview of the bell curve of violent death tolls in the 20th Century, but these charts tend to obscure the details since 1945, beginning with the India/Pakistan civil war, the birth of Israel, and the Cold War outbreaks in Korea (1950-53), Vietnam (1964-73), and the regional conflicts in the 1980s.

There has also been a small bump in battle deaths since 2010, mostly centered in Syria and the Middle East. Outside of that troubled region, the story has been more accurately described in the ancient warning about “rumors of wars” (in North Korea and elsewhere). There have also been elevated rumors of trade wars, which are constantly being averted or postponed through negotiations, so there are several things to be thankful for on this Memorial Day weekend – far fewer wounded warriors in the last quarter century, and far fewer wars worldwide. This is one reason why the Dow is up 12-fold since the Cold War ended.

Tonight, the show “The Americans” concludes on the FX network. The concluding season is set in late 1987, when Soviet leader Mikhail Gorbachev is visiting America for strategic arms talks. This may have been the last gasp of the Cold War. Just six months later, U.S. President Ronald Reagan visited Moscow. The Russians liked Reagan and he liked them as his “evil empire” rhetoric thawed into a veritable love fest. Here are two benchmarks of the end of the Cold War from this time of year in Reagan’s final years:

June 12, 1987 – In Berlin, President Ronald Reagan said, “Mr. Gorbachev, Tear Down This Wall!”

May 31, 1988 – In Moscow, Reagan praised the “Russian spring” of Glasnost and Perestroika, the “marvelous sound of a new openness… leading to a new world of reconciliation, friendship, and peace.”

In the 30 years since Reagan gave that talk at Moscow State University, stocks are up more than 10-fold.

Now, on to the outlook for today’s market:

Corporate Liquidity Implies More Rallies to Come

So far, the recent tax cuts have not generated much in the way of a stock market rally. The major tax cuts of the 1920, 1960s, 1980s, and 2003 generated major stock market rallies, since more money in the pockets of consumers and the coffers of corporations tends to feed the Wall Street money machine. There was an initial buying frenzy in January followed by a “tariff tantrum” and volatility storms since then.

Due to the very high corporate tax levels (until 2018), major U.S. corporations had retained their overseas earnings and about 15% of their overall profits overseas. The run rate for this cash savings has been $215 billion per year over the past eight years, or about $1.7 trillion since 2010, and $2.9 trillion since 2000. Corporations can now repatriate this cash at much lower tax rates and use the cash for expansion or hiring, or for dividends or share buy-backs, or mergers and acquisitions – all activities generally bullish.

The 2018 buy-back activity has been running at a $600 billion annual rate, which would be an annual record (the previous four-quarter record was $589 billion for the year ending 1Q-2016). Economist Ed Yardeni said last Tuesday (in “Some Like it Hot”) that “Over the past four quarters through Q1-2018, dividends totaled a record $436 billion. If buybacks are on track to exceed $600 billion this year, then total cash distributed to shareholders will easily exceed $1.0 trillion for the first time on record.”

We’ve already seen that first-quarter earnings rose 24% over 2017’s first quarter, more than double the pre-tax-cut earnings estimates, and profit margins hit a record high 12%, up from 10.9% the previous quarter. Overall S&P 500 net operating income rose 25.4% year-over-year to a record $1.2 trillion last quarter. These huuuge Trumpian numbers won’t be repeated, but so what?  They have opened the gates for double-digit gains half that size to follow, and you can’t sneeze at 10% to 12% in following quarters.

The U.S. economy only grew at about 1/10th the rate of corporate earnings in the first quarter – +2.3% GDP vs. +24% earnings, but that’s healthy. We don’t want a runaway (inflationary) growth spurt this late in the cycle. Moderate growth means the expansion can last longer in Goldilocks style, until 2020 or later. The further out a recession is delayed, the longer this bull market can last. (They don’t die by the clock.)

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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