Everything Is Coming Up Roses!

You could almost hear Ethel Merman belting out "Everything's Coming Up Roses." That's how good the financial and economic situation is.

The Standard & Poor's 500, an index of the largest 500 publicly offered companies, closed Friday at a record all-time high.

Investors naturally have to wonder if stocks are becoming a gamble.

While investors have to be skeptical in good times as well as bad and must stay true to a long-term investment plan, this stock market rally has a strong basis in economic fundamentals.

This past week, economist Ed Yardeni and a few leading investment strategists on Wall Street began saying that a corporate tax cut was likely. A Republican majority controls both chambers of the U.S. Congress and under President-elect Donald J. Trump, you can expect corporate tax rates to be reduced. As a result, strategists have begun raising earnings estimates on the 500 S&P companies, most recently to $142 per share.

Given the current market valuation - the average share in the S&P 500 index is selling at a multiple of 19 times earnings expected in 2018, a cut in corporate taxes could send corporate earnings soaring.

John Maynard Keynes, perhaps the most influential economist of the last century, in 1936 coined the phrase, "animal spirits," to describe instincts unleashed that prompt humans to action - rather than inaction. A corporate tax cut is the kind of unexpected boost to the economy that unleashes animal spirits.

This economic expansion, at 91 months, is still more than two years away from lasting longer than the 120-month expansion of the 1990s, the longest in modern U.S. history. It could keep going on. In fact, because of the great economic destruction wrought by The Great Recession, this recovery has been attenuated - with support of nearly dormant inflation. A corporate tax cut could accelerate growth.

Recessions trigger bear markets, and the 2.4% growth rate expected in 2017 is good news. However, as shown in this chart, not every bear market was accompanied by a recession. You can have a correction in stock prices anytime, or even a bear market, even in economic expansions.

That's the main reason why staying diversified and committed to a long-term strategic plan is so important to achieving your goals over the long run. The slow but steady method for successful investing by broadly diversifying never is a star, which is worth noting at this very stage in the long bull market.

The Standard & Poor's 500 index closed at a record 2,276.98. The Down Jones missed the 20,000 mark by a fraction.

A drop in stock prices historically happens every year or two. While investor ebullience recently is rooted in economic fundamentals, investors could change their minds fast, particularly if something unexpected happens. While evidence of a global expansion is increasing, political, social, and other turmoil is always possible. Barring that kind of unexpected bad event, we may hear Ethel Merman singing a lot in the months ahead.

With fake news flourishing and stock prices hitting new highs, we are an independent financial news source. Uninfluenced by big media, Wall Street, or politics, we offer prudent analysis in these weekly emails about news affecting your wealth over the long run. Please feel free to share our timely weekly reports with your family and friends.

¹ 2017 (estimated) and 2018 (estimated) bottom-up S&P 500 operating earnings per share as of January 4, 2017: for 2017(e), $132.69; for 2018(e), $148.32.

This was written by a veteran financial journalist based on data compiled and analyzed by independent economist, Fritz Meyer. While these are sources we believe to be reliable, the information is not intended to be used by as financial advice without consulting a professional about your personal situation. Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss. Past performance is not an indicator of your future results.