EC Glass Half Full Or Half Empty?

We live in a time of confusing dichotomies, which makes deciphering the flood of daily data quite challenging. In that context, determining whether the current economic fundamentals should be viewed from a glass half empty or glass half full perspective can be daunting.

More specifically, stock markets have again recently hit new all-time record highs, yet if you read the newspaper headlines, you might think we’re in the midst of Armageddon. Last month, the Dow Jones Industrial Average stock index eclipsed 21,000 and the technology-heavy Nasdaq index surpassed the psychologically important 6,000 threshold. In spite of the records, here’s a sampling of the steady stream of gloomy feature stories jamming the airwaves:

French Elections – Danger of European Union Breakup

Heightened Saber Rattling by U.S. Towards North Korea

Threat of U.S. Government Shutdown

First 100 Days – Obamacare repeal failure, tax reform delays, no significant legislation

NAFTA Trade Disputes

Russian Faceoff Over Syrian Civil War & Terrorism

Federal Reserve Interest Rate Hikes Could Derail Stock Market

Slowing GDP / Economic Data

Given all this doom, how is it then that stock markets continue to defy gravity and continually set new record highs? Followers of my writings understand the crucial, driving dynamics of financial markets are not newspaper, television, magazine, and internet headlines. The most important factors are corporate profits, interest rates, valuations, and investor sentiment. All four of these elements will bounce around, month-to-month, and quarter-to-quarter, but for the time being, these elements remain constructive on balance, despite the barrage of negative, gut-wrenching headlines.

Countering the perpetual flow of gloomy, cringe-worthy headlines, we have seen a number of positive developments:

Record Breaking Corporate Profits: Profits are the chief propellant for higher stock prices, and so far, for the 1st quarter, S&P 500 company profits are estimated to have risen +12.4%– the highest rate since 2011, according to Thomson Reuters I/B/E/S. As I like to remind my readers, stock prices follow profits over the long-run, which is evidenced by the chart below.