Fundamentals

Based on current results, Clinton and Trump will face off in the presidential election in November. That election though, is more than seven months away which, in politics, can be a lifetime. At least we have entertainment that’s not prime time cartoons.

The economy seems to be working, if we look at fundamentals. First, those things which usually cause recessions aren’t happening just now. In the past, recessions have been caused by major policy mistakes by the Federal Reserve, soaring oil prices, or bursting bubbles in large parts of the economy. None of that is currently happening.

While the Chinese economy is slowing, the U.S. has nominal exposure to China, based on exports, as exports to China account for less than 1% of U.S. GDP. And the slowing in China is from a 10% annual growth rate to a 6.9% growth rate, compared to the U.S. economy, which is struggling to grow at 2%. Even if the Chinese government reduces the growth rate again, which is likely, given their preference for opaque reporting, feeding and housing 1.35 billion people generates a lot of economic activity.

Consumers are in good shape. On an inflation adjusted basis, it has been more than 40 years since consumers have spent less on gasoline than they are currently spending. The household savings rate is back up to 5.5%. Consumer confidence, as measured by the Conference Board, was up in January, over December.

Stocks are reasonably priced. According to the Dow Jones Market Data Center, the forward P/E (price earnings ratio) of the 30 stocks in the Dow Industrials is 15.35, compared to more than 17 a year ago. The Russell 2000 has a forward P/E of 15, and the forward P/E of the S&P 500 is 15.75, with a dividend yield of 2.34%. By comparison, the current yield for ten year Treasury notes is 1.76%, and the yield on 20 and 30 year Treasury bonds is 2.17% and 2.61% respectively, according to the Data Center here.

The 2.34% yield on the S&P 500 is a spread of 0.58, or 25% more, than the 1.76% yield on ten year Treasury notes. Historically, this has been a healthy sign for stocks. If Treasury prices and dividends paid don’t move, stock prices would need to advance about 25% to have a yield equivalent to the ten year Treasury note.

Apple and the FBI are duking it out in court over the hacking of an iPhone. In case you missed the story, the FBI wants Apple to break its encryption on the phone belonging to one of the recent California terrorists, so the FBI can access data on the phone. How do we measure security on the one hand, with liberty and privacy on the other?

Antonin Scalia was born in Trenton NJ in March 1936, and died Saturday a week ago, at a ranch in Texas. At the time of his death, he was an associate justice on the Supreme Court, which office he had held since 1986. He graduated from Xavier High in Manhattan, Georgetown University in Washington D.C., and Harvard Law. He spent several years in private practice before becoming a law school professor at the University of Virginia, and being appointed by President Reagan to the Supreme Court.

He was the only child of Salvatore and Catherine Panaro Scalia. His father migrated from Sommatino Italy, and his mother was born in Trenton NJ to Italian immigrant parents.

Scalia and his wife Maureen were married for 55 years, had nine children and, at the time of his death, 28 grandchildren. Scalia was as a devout Roman Catholic, brilliant thinker, noted conservative, and ardent defender of the constitution.

Quotes of the week:

“There is nothing new in the realization that the Constitution sometimes insulates the criminality of a few in order to protect the privacy of us all.” – Antonin Scalia

“They who can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety.” – Benjamin Franklin

Randy_Blog

Randy Brunson
Randy Brunson is the founding shareholder of Centurion Advisory Group. Mr. Brunson
has invested most of his thirty five year career in the area of financial services.

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