So far, the escalating trade and currency wars aren’t weighing on the weekly stock market fundamentals that I track and discuss below. That’s because the US economy received a big boost from the Tax Cuts and Jobs Act (TCJA) at the end of last year. Federal tax receipts as a percentage of nominal GDP dropped from 18.2% during Q4-2017 to 17.5% during Q1-2018 (Fig. 1 and Fig. 2). That’s the lowest reading since Q4-2012. Normally, this ratio drops during recessions, not during expansions. So the TCJA is giving a big boost to an economy that is already at full employment. Let’s have a closer look:
(1) Individual tax receipts still growing after TCJA. The y/y growth rate of income taxes in personal income fell to 3.6% during May, down from a recent peak of 7.1% at the end of last year (Fig. 3). The ratio of personal income taxes to personal income has been in a flat trend around 12.5% since 2015. It edged down to the bottom of the range in May (Fig. 4). In other words, it’s hard to see the tax cut in these data because personal income has been growing, boosting individual income tax receipts even after TCJA-reduced tax rates. I suppose supply-siders can take credit (perhaps prematurely) for this development.
By the way, also contributing to the strength of consumer spending is the downtrend in the personal savings rate, which started in late 2015 (Fig. 5). Incredibly, the 12-month sum of personal saving has been nearly halved from a recent high of $829 billion during November 2015 to $458 billion during May (Fig. 6).
(2) Corporate profits jumped after TCJA. Corporate profits also received a big boost from the TCJA. In the GDP accounts, corporate profits taxes plunged from $446 billion (saar) during Q4-2017 to $332 billion during Q1 of this year (Fig. 7).
Industry analysts have raised their 2018 consensus estimate for S&P 500 earnings per share by $13.35 since late last year through the first week of July (Fig. 8). That’s a 9.0% increase that is mostly attributable to the slashing of the corporate tax rate. Soaring earnings is the bullish signal that is offsetting all the bearish noise coming out of Washington.
(3) Boom-Bust Barometer near recent record high. The recent weakness in some key commodity prices, such as the price of copper, hasn’t weighed heavily on the CRB raw industrials spot price index (Fig. 9). Meanwhile, initial unemployment claims remains at its lowest readings since early December 1969 (Fig. 10). As a result, my Boom-Bust Barometer (BBB), which is the ratio of the CRB index to jobless claims, remained in record-high territory during the 7/14 week (Fig. 11).
(4) Forward earnings soaring. The BBB is highly correlated with S&P 500 forward earnings, which soared to yet another record high of $170.21 per share during the July 19 week (Fig. 12). (As I explain in Chapter 13 of my book, Predicting the Markets, forward earnings is the time-weighted average of industry analysts’ consensus estimates for earnings during the current year and the coming year. It tends to accurately lead actual earnings during expansions. However, it consistently fails to anticipate recessions.)
(5) FSMI remains bullish. My Fundamental Stock Market Indicator (FSMI) is simply the average of the BBB and the weekly Consumer Comfort Index (Fig. 13). It remains at record highs, and has been highly correlated with the S&P 500 since 2000. The FSMI isn’t a leading indicator of the stock market, but it is useful for either confirming or raising some doubt about the direction of stock prices. In any event, it is still bullish, and helps to explain why stock prices have held up so well in the face of Trump’s escalating trade war with our major trading partners.
(1) Individual tax receipts still growing after TCJA. The y/y growth rate of income taxes in personal income fell to 3.6% during May, down from a recent peak of 7.1% at the end of last year (Fig. 3). The ratio of personal income taxes to personal income has been in a flat trend around 12.5% since 2015. It edged down to the bottom of the range in May (Fig. 4). In other words, it’s hard to see the tax cut in these data because personal income has been growing, boosting individual income tax receipts even after TCJA-reduced tax rates. I suppose supply-siders can take credit (perhaps prematurely) for this development.
By the way, also contributing to the strength of consumer spending is the downtrend in the personal savings rate, which started in late 2015 (Fig. 5). Incredibly, the 12-month sum of personal saving has been nearly halved from a recent high of $829 billion during November 2015 to $458 billion during May (Fig. 6).
(2) Corporate profits jumped after TCJA. Corporate profits also received a big boost from the TCJA. In the GDP accounts, corporate profits taxes plunged from $446 billion (saar) during Q4-2017 to $332 billion during Q1 of this year (Fig. 7).
Industry analysts have raised their 2018 consensus estimate for S&P 500 earnings per share by $13.35 since late last year through the first week of July (Fig. 8). That’s a 9.0% increase that is mostly attributable to the slashing of the corporate tax rate. Soaring earnings is the bullish signal that is offsetting all the bearish noise coming out of Washington.
(3) Boom-Bust Barometer near recent record high. The recent weakness in some key commodity prices, such as the price of copper, hasn’t weighed heavily on the CRB raw industrials spot price index (Fig. 9). Meanwhile, initial unemployment claims remains at its lowest readings since early December 1969 (Fig. 10). As a result, my Boom-Bust Barometer (BBB), which is the ratio of the CRB index to jobless claims, remained in record-high territory during the 7/14 week (Fig. 11).
(4) Forward earnings soaring. The BBB is highly correlated with S&P 500 forward earnings, which soared to yet another record high of $170.21 per share during the July 19 week (Fig. 12). (As I explain in Chapter 13 of my book, Predicting the Markets, forward earnings is the time-weighted average of industry analysts’ consensus estimates for earnings during the current year and the coming year. It tends to accurately lead actual earnings during expansions. However, it consistently fails to anticipate recessions.)
(5) FSMI remains bullish. My Fundamental Stock Market Indicator (FSMI) is simply the average of the BBB and the weekly Consumer Comfort Index (Fig. 13). It remains at record highs, and has been highly correlated with the S&P 500 since 2000. The FSMI isn’t a leading indicator of the stock market, but it is useful for either confirming or raising some doubt about the direction of stock prices. In any event, it is still bullish, and helps to explain why stock prices have held up so well in the face of Trump’s escalating trade war with our major trading partners.
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