The Best Investment News of 2017

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club
investment news 0

If it continues - and it certainly looks like it will - the current bull market will celebrate its ninth birthday in less than three months.

From the 2009 low, blue chips - with dividends reinvested - have more than quadrupled. Small caps have quintupled.

Yet I still talk to investors who have missed out entirely.

And pessimism remains high. Believe it or not, more money has flowed out of equity mutual funds this year than into them.

Why have so many foregone this historic bull market?

Many obsess over mainstream media reports that emphasize the underwhelming strength of the economic recovery, the low labor participation rate, the size of the federal debt, the political dysfunction in Washington, the Federal Reserve’s plans to raise interest rates and other downbeat news.

Since the skies appear perpetually gray to them, they don’t venture into the market. But perhaps they would if they focused instead on the many positive factors undergirding this rally.

For example...

  • Unemployment is at a 17-year low (with 228,000 net new jobs created in November alone). Even though the workforce expanded by 1.1 million workers in the past year, the number of people employed is up 1.87 million.
  • Household income is higher. The mainstream media likes to create the impression that incomes are stagnant. Wrong.
  • “Total earnings” are up a solid 4.8% from a year ago. This is due to a 2.5% increase in wages combined with an increase in hours worked.
  • Inflation is MIA. Policymakers have long argued that the consumer price index would rise as unemployment fell below 4.5%. But just the opposite has happened. The core personal consumption expenditures deflator - the central bank’s favorite gauge - registered just 1.4% in October, down from 1.8% in February. It hasn’t hit the Fed’s 2% target in five years.
  • Energy is cheap. The revolution in hydraulic fracturing and horizontal drilling has created abundant, low-cost domestic energy, boosting both the economy and our national security. (Meanwhile it has undermined political foes like Russia, Venezuela and Iran that are dependent on high commodity prices.)
  • Manufacturing is rebounding. The dollar is firm. Consumer confidence is up. And corporate earnings are at record levels.
  • Plus, world economic growth is kicking into gear. While the U.S. has enjoyed two consecutive quarters of 3%-plus economic growth, Goldman Sachs forecasts 4% global growth in 2018. That will further boost corporate earnings.
  • The Fed just raised interest rates, and the market is pricing in at least two more hikes in 2018. This is supposed to be a negative. Yet investors are well aware of this - and shrug. They rightly see it as further evidence that the economy is strong enough to go without central bank support.
  • Trump’s $1.5 trillion Tax Cuts and Jobs Act will further boost economic activity. It will make our corporate tax rate more competitive, give consumers more money to spend, encourage foreigners to set up or expand operations here, and incentivize U.S. companies to repatriate much of the $2.5 trillion in cash held abroad.

If you aren’t persuaded by low inflation, rock-bottom interest rates, cheap energy, rising incomes, greater consumer confidence, full employment, tax cuts, synchronized global growth and record corporate profits, there probably isn’t much that will lure you into the market.

But the rest of us can celebrate this year’s stock market performance - and justifiably feel that we are entering 2018 with the wind at our backs.

Good investing,

Alex

Thoughts on this article? Leave a comment below.

A Great Stock for a Great Economy

Alex has a lot of well-founded optimism about the near future of our economy.

But as his Oxford Communiqué subscribers know, superior returns don’t come from economic forecasting. They come from buying and holding great stocks.

Markel Corp. (NYSE: MKL) is one of them - and it’s no wonder Alex has been recommending it for years. Here he is checking on the insurance giant back in January...

Founded in 1930, Markel is based in Richmond, Virginia. Like Berkshire Hathaway, the company has substantial interests in insurance and reinsurance, general liability, property, workers’ compensation, and other product lines, including accident and health insurance.

Markel has a market cap of $12.6 billion. Roughly 60% of this represents the firm’s insurance operations. The other 40% is attributable to a stock portfolio run by Tom Gayner.

Gayner is the best portfolio manager you’ve never heard of.

Over the past 17 years, a period that includes two severe bear markets and the Great Recession, the S&P 500 - with dividends reinvested - has returned 4.2% annually. Gayner’s stock portfolio has returned 11.3% a year over the same period.

To give you a better idea of what a substantial difference that is, consider this: $100,000 invested in the S&P 500 over this period turned into $211,338. The same amount invested with Gayner turned into $670,119.

That’s all-star performance.

However, 2016 was not a particularly good year for Markel. The company’s shares returned just 2.4%, compared to 12% for the S&P 500. (As a property and casualty insurer, Markel had exposure to Hurricane Matthew and a major earthquake in New Zealand.)

This is not a big issue. Even the greatest investors don’t beat the market every quarter or every year. But when they outperform, they really outperform.

In 2015, for instance, Markel was up 29.4% vs. 1.4% for the S&P 500. Our shares have climbed 113 points since we got in a year and a half ago.

Gayner’s secret? He likes profitable businesses with low debt, compelling valuations, great management and plenty of opportunities to reinvest future profits.

Some of his major holdings include CarMax, Walgreens, Brookfield Asset Management, Disney, Diageo, Marriott International, Home Depot, Deere & Co, UnitedHealth, UPS, Archer Daniels Midland and Unilever.

He tends to let his winners run a very long time. With a 35% tax rate, he says, “If I sell, I have to invest the proceeds, and I’m reinvesting $0.65 on the dollar. That makes the hurdle for switching a lot higher.”

- Samuel Taube with Alexander Green

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