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The S&P 500 Index officially launched 60 years ago on March 4th, 1957. While the Dow Jones Industrial Average — which started way back in 1885 — is the most well-known reference point for the state of the stock market, the S&P 500 is far and away the gold standard for investors.
It's the most popular index in the world, with almost $2.4 trillion indexed to it. Nothing else comes remotely close.
Why did the S&P become so famous? And why did creating indexes by market capitalization win out over other indexing systems, like weighting all stocks equally, or by price, as the Dow Industrials do?
Standard & Poor's was running indexes for many years prior to the invention of the S&P 500. They were running four separate indexes since the 1920s — Industrials, Transportation, Utilities and Financials. In 1957, they decided to combine all four indexes into one index of 500 companies, and the S&P 500 was born.
Here's the key sentence in her speech to the Executives Club of Chicago: "The economy has essentially met the employment portion of our mandate and inflation is moving closer to our 2 percent objective."
In other words, the economy has essentially met the Fed's goals.
This is a remarkable change in tone, but even more remarkable is the market reaction: no change in equities.
The S&P 500, down 2 points before the speech, was essentially unchanged.
Had something close to this been said a year ago, the Dow would have dropped 200 points immediately.
The difference is the Fed has been prepping markets for some time, and judging by the market reaction, the prep has been successful. It began a few months ago, but it began in earnest during Yellen's Congressional testimony. This week Fed official after Fed official has sounded eager to raise rates — the only question was, would she be?
This new phase in Fed policy means they are not as worried about inflation or global risks. During the question and answer portion, Yellen surveyed the global economic outlook and concluded, "Risks are more balanced than I have seen in some time."
She's right about that. It began before Donald Trump's electoral victory. The real reflation trade began in the summer, when interest rates finally began rising and better economic data began materializing in many countries, much of it driven by higher commodity prices.
But the Trump victory was the icing on the cake. The Fed finally has an ally: fiscal stimulus, which has convinced the markets that the economy can suddenly levitate to 3 percent growth, from 2 percent.
That means investors believe the economy can withstand higher interest rates without dramatically slowing economic activity.
The jury is still out on whether this can be accomplished. The irony is Yellen clearly owes a tip of her hat to Donald Trump, who is no friend of hers.
The Snap IPO was one of the smoothest openings we have seen in a long time. No drama at the pre-open, the open, during the day, or the close.
It priced at $17, opened at $24, closed at $24.48.
Why the pop? Four reasons:
1) Markets are at historic highs, the most important factor of all. But a strong stock market is a necessary, but not sufficient, ingredient in an IPO pop.
2) IPO returns have been strong. The average IPO in the last year (March to March) is up 26.4 percent, according to Renaissance Capital. The Renaissance Capital IPO ETF, a basket of the 60 most recent IPOs, is up about 28 percent.
3) Lack of in-demand IPOs. It was a miserable year for IPOs in 2016: 169 companies went public, a nearly 40 percent decline from 2014. 2017 has started out poorly as well. There's plenty of demand, there's just nothing to buy that investors want at the right price.
4) A small float — just 14 percent of the company. This is a typical tactic of tech-oriented firms, which often seek to keep the float to about 10percent or a little more to keep the scarcity level high.
What's next? I've been waiting for the IPO market to open up since late June of last year (seems like forever), but this may finally do it. I am hearing calendars are starting to fill up, bankers are being called.
All of this could fall apart if the market heads south, but here's a few thoughts.
There's three companies doing road shows: 1) Canada Goose, a maker of high-end parkas, 2) women apparel seller J. Jill, and 3) Presidio, a reseller of IT products.
That's a good sign. But there's a raft of companies sitting out there — more than 100 — that could quickly make announcements. Potential candidates:
Mulesoft , an enterprise software firm
Cloudera, a data analytics platform
Chuck E. Cheese, an operator of over 700 family-style restaurants and entertainment centers
Prosper Marketplace, a peer-to-peer lending company
OK, so there's no Uber's or Dropbox's or Spotify's here, but these are substantial companies. And even companies that have been putting off their IPOs like Blue Apron, which provides pre-packaged meals for home meal preparation, could revive if the market holds up.
This is just the tip of the iceberg. If the market holds up and the early chatter is right, we should start seeing the calendar dramatically increase by mid-April.
The markets wanted more specifics on President Donald Trump's proposals on tax reform, infrastructure spending, and reduction in regulations. It didn't get it.
It didn't get anything on a lot of things: nothing on banks or financial reform. Nothing on housing finance reform. Nothing on Russia or China. Almost nothing on energy. Nothing on the upcoming fight over raising the debt ceiling. The emphasis was on Obamacare and immigration, with some mention of border tax issues.
No matter: traders almost unanimously have viewed the speech as a success. The market got something that is perhaps more important: it got a speech which clearly implied that there was a good chance the president could accomplish those goals.
That's a key factor in why the rally has been sustained, and why it hasn't experienced any significant selloffs. Investors have given Trump the benefit of the doubt, and as long as they believe he can push through the agenda the rally will hold up.
Next up is the Fed. Chair Janet Yellen speaks on the economy in Chicago on Friday. The CME Fed fund futures now has the probability of a March rate hike at 70 percent, with two-year Treasury yields near the highest levels since 2008. The Fed's preferred inflation indicator, the Personal Consumption Expenditures (PCE), which measures prices paid by consumers for goods and services, was 1.9 percent year-over-year, the highest level since 2012.
Yellen is speaking at the Executives Club of Chicago on Friday, one day before the Fed enters a blackout period, during which all of the central bank's officials will be quiet ahead of its meeting on March 14 and 15.
So, this will be the last shot she has at summing up the state of the economy.
Here's the issue: Trump is proposing spending programs that seem to imply the economy is weak and in desperate need of help.
But Yellen doesn't see it that way. The economy is clearly in a recovery mode, and she seems ambivalent about how much additional fiscal stimulus the economy might need.
What Yellen and company think about the Trump plan matters a lot. If Trump gets his way and suddenly we have a large tax cut — with additional spending hikes in the form of defense spending and infrastructure — it's likely the Fed will view that as a notable risk to their inflation outlook, just as it looks like they might finally be getting to that elusive 2 percent target.
That means it's far more likely the Fed will get much more aggressive raising rates—we could be talking about the possibility of four rate hikes this year.
So how this plays out is critical because the Fed's commentary is going to color trader perceptions.
And what Trump is saying — or what Trump's associates are leaking — cannot help but make the Fed worried about: 1) a sharp increase in defense spending, 2) leaving entitlements unchanged, and 3) a "big statement" on infrastructure spending.
And over the weekend, the talk was that the border adjustment tax (BAT) — which House Speaker Paul Ryan's plan relies on for offsetting revenue — was dead or dying because it cannot get through the Senate.
Sure sounds to me like there is going to be massive deficit spending coming!
If you don't think this is a problem for the Trump administration, you're kidding yourself. Last night, Elaine Chao made her debut as Transportation secretary at the National Governor's Association. Here's what she had to say about the infrastructure spending: "Everybody wants a better transportation system, but very few people want to pay for it, so that's a big conundrum,'
Sounds to me like everything is still on the table on this one: an increase in the gasoline tax or some other "pay to play" plan. Tax credits and other ways to get the private sector involved in some kind of "public-private partnership," including more use of private toll roads. Using corporate profits returned from overseas.
What's likely to happen? Over the weekend, traders were acting like they were throwing down some kind of ultimatum to President Trump: it's put up or shut up time on the Trump rally, Mr. President. He can't get away with vague promises of cuts in taxes, less regulation, and a big infrastructure plan anymore. We need details, and we need them now.
What nonsense. That bluff has already been called.
Stocks have modestly turned around after a rocky morning session Thursday.
The president held a meeting with a number of industrial CEOs late in the morning. Dow Chemical CEO Andrew Liveris summed up the tone: "All the CEOs that were here today and in the last meeting are very encouraged by the pro-business policies of President Trumpand his cabinet."
Still, it's the Mnuchin interview with CNBC's Becky Quick this morning that had the markets buzzing all morning.
Treasury Secretary Steve Mnuchin is now learning what it's like to be Federal Reserve Chair Janet Yellen. By that, I mean the Treasury secretary is learning how virtually every syllable out of his mouth is being parsed and traded upon, regardless of whether what the market believes he is saying is what he actually meant to say.
After the interview, the dollar weakened, bond yields moved down, and while the S&P opened at a new high it quickly gave up all its gains and moved into negative territory. Most importantly, the banks were among the weakest sectors.
What happened? Traders chose to focus on Mnuchin's comment that he wanted tax reform to pass by the August recess, which many doubt can happen. There seems to be a sense that reforms will take longer than many anticipated, after Mnuchin said growth would come "towards the end of next year," a time period likely further out than traders anticipated.
More importantly, they chose to focus on what appears to be the order of the priorities in this comment: "It's going to be focused on middle-income tax cuts, simplification, and making the business tax competitive with the rest of the world."
There's nothing extraordinary in this statement, but traders interpreted this to mean that a middle-income tax cut might be even more important than a big corporate tax break. The concern is that the corporate tax break may not be as great as anticipated. Since this has been big fuel for the market, stocks and particularly banks have been struggling since the open.
Perhaps more significant is Mnuchin's acknowledgment that the stock market rally has been a report card on the Trump administration: "This is a mark-to-market business and you see what the market thinks."
This is an extraordinary claim for a Treasury secretary. Mnuchin's predecessors have historically been neutral on markets, particularly on things as sensitive as stocks and the dollar.
It is also a very dangerous game since if you live by the stock market, you die by the stock market.
By this measure, Mnuchin should be praising Barack Obama, considering the S&P 500 moved up nearly 200 percent during his time in office. Or perhaps he should be praising Janet Yellen and Ben Bernanke, who are also given much of the credit for the rally.
Home Depot is at another historic high on Tuesday following its excellent earnings report, but a major factor behind its stock price rise has been dividend hikes (it raised its dividend 29 percent on Tuesday), and an aggressive buyback program, including the new $15 billion share buyback program that it also announced.
To give you an idea of just how big a $15 billion buyback is, the company's market cap is roughly $175 billion, so we are talking about buying back nearly 9 percent of the company.
Even by the standards of the last decade, that is a big buyback.
Home Depot is part of a select group of companies I call "buyback monsters," companies that have bought back more than 25 percent of their shares since 2000.
Why 2000? Because most companies hit their highest levels of shares outstanding between 2000 and 2006; since then, most companies have been reducing share count, in some cases aggressively.
Consider Home Depot. In 2003, they had 2.36 billion shares outstanding, according to Factset. Today, they have 1.21 billion shares outstanding.
That is half the shares they had outstanding 14 years ago.
All other things being equal, that means earnings are twice as high as they would have been in 2003, when there were twice as many shares outstanding.
Home Depot isn't alone. IBM had 1.9 billion shares outstanding in 1997, today it has about 950 million, again less than half what it had 20 years ago.
ExxonMobil had 7 billion shares outstanding in 2000, today it has 4.1 billion, a reduction of about 42 percent.
This is not a trend that is limited by any one sector. There are companies that have been aggressively reducing their share counts in Industrials, Technology, and Consumer:
Consumers: share count reduction
Gap: 55 percent since 2005
Bed Bath & Beyond: 50 percent since 2005
McDonald's: 36 percent since 2000
Disney: 27 percent since 2006
Procter & Gamble: 24 percent since 2005
Why are there buybacks at all? They were originally used to support the issuance of stock options. The options increased the share count outstanding, so to keep the count down the company bought back shares.
But as the opportunity for significant top-line growth waned, buybacks to reduce share counts became a separate strategy to prop up earnings growth.
And that's my beef: Buybacks are a form of financial engineering. Here's another problem: It's not at all clear that buying companies just because they are buying back shares will be a successful investment strategy.
Take IBM — despite being one of the most aggressive buyback monsters on the Street, you can't say IBM's stock price has soared in the last decade. In 2014, the company eased off a bit on its buybacks, and the stock headed south.
It headed south because IBM was beset by fundamental growth issues: Its revenues from its old line businesses were shrinking and there was notrevenue from nascent businesses (like Watson and artificial intelligence) replacing it.
The lesson: No amount of financial engineering like buying back shares can replace management's inability to grow the business.
Not surprisingly, there are ETFs for all this, but their performance has been spotty. ThePowerShares Buyback Achievers ETF (PKW) tracks a market-cap-weighted index of companies that repurchased at least 5 percent of their outstanding shares in the previous 12 months. Top holdings include McDonald's, Boeing, and QUALCOMM.
Is the Donald Trump rally over?
Refresh my memory. Is this the fourth, fifth, or sixth time I have been asked this question by traders since mid-December?
I don't even know. The S&P 500 ended up roughly 1.3 percent for the week. But because the market tapped out at 2,351 Wednesday afternoon, and has drifted lower since then, there is the by-now usual wailing and gnashing of teeth, wondering if the Trump rally is over.
Relax. The two underpinnings of this rally — the Trump Rally, and the reflation trade — are both very much intact.
The reflation trade — the rise in interest rates and the slow, near-synchronous improvement in economies in the U.S., Europe, Asia and Latin America — is continuing.
The Trump trade — the lowering of corporate taxes, the reduction of regulation, and an infrastructure spending program — is also still very much intact.
It's intact despite the fact that President Trump has indicated that Obamacare may be a legislative priority over tax cuts. It's intact despite the fact that SenatorMike Crapo, chair of the Senate Banking Committee, said on Wednesday that regulatory reform will take 12 to 24 months.
You can argue — as my old colleague Ron Insana has — that risk is undervalued.
I won't argue with that. We should have more significant profit taking, but we're not getting it.
That tells me there is still a lot of momentum. We hit another historic high of 2,351 on Wednesday.
Don't you think we should at least see some technical deterioration before we declare the rally over?
But just look at how the market acts. Betting on a market drop has been a total loser. On days like Friday and Thursday, when the markets are down, there is no significant volume, which is a positive.
Everyone is hopeful that the market drops more so they can buy the dips, not get out.
The alternatives? Bonds don't look attractive given inflation, another reason to stay the course.
Where do we go from here? Have you noticed that all the strategic experts have been too conservative? The average strategist has been at roughly 2,350 for the S&P 500 by year-end, with only a few in the 2,400 range.
Well, we are already there. We're at 2,350. And it's only February!
What about Trump? Of course, his unpredictability is a problem, but look at what happened with the immigration order. He found out that there were some checks on his unpredictability.
On the economy, there are more ways that he can help than hurt.
That tells me there is no reason we can't go through 2,400 on the S&P 500.
Bottom line: the global backdrop is getting better. The earnings outlook is improving. The advance/decline line remains strong. Market leadership remains in financials and technology, supporting the recovery in cyclicals. Companies are making good money in the current environment, so changing the rules is just more gravy.
My take: unless you believe that there will be a huge disappointment in earnings this year, it's hard to argue that stocks are dramatically overvalued.
The worst thing you can say is that the market is a hold, with no big reason to sell.
Sure, it's a little boring some days, the volume is light, and the narrative has stayed the same for a while, but consolidation is a good thing.
It's not a table-pounding buy, but net-net, there's no reason you shouldn't stay with stocks.
The Trump administration plan to cut corporate taxes was met with skepticism because it could boost the deficit.
Acting SEC Chairman Michael Piwowar has asked the staff of the regulator to come up with a proposal.
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