DEAR TRUST OFFICER: How about that stock market? Can it last?
— HAPPY INVESTOR
DEAR HAPPY INVESTOR:
Higher stock prices are driven by two factors: increasing earnings and increasing investor speculation. The good news for investors is that the stock market records set in August were grounded upon increased earnings and a strongly growing economy. We do not seem to be in a bubble.
Second-quarter GDP growth was revised upward, to a strong 4.2%, by the Commerce Department. The third quarter growth looks likely to be over 4% as well. Second-quarter after-tax profits rose 16.1%, the largest year-over-year gain in six years.
Sales of the S&P 500 companies grew by 9.5% in the second quarter, leading to a 24.8% increase in earnings. A strong economy translates to increasing consumer confidence. The Conference Board reported in August that its consumer confidence index reached 133.4, the highest reading since October 2000.
Interestingly, as a result of the booming economy federal tax revenue has gone up, not down, following enactment of the Tax Cuts and Jobs Act last year. The Congressional Budget Office reports that income and payroll tax collections rose 5% through the first nine months of this fiscal year, a whopping $105 billion. This more than offset the decline in corporate tax collections of $66 billion. Overall tax receipts are up 1%.
However, this torrid rate of growth is expected to slow. The current bull market is a long one by historical standards. Eternal vigilance is the price of owning a stock portfolio.
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