Billionaire's Portfolio

October 23, 2017, 4:00 pm EST

We talked yesterday about the move in interest rates. We have the collision of two big events nearing for the interest rate markets.

Event number one, as we discussed yesterday, is the President’s decision on the next Fed chair. Event number two will come tomorrowmorning with the European Central Bank meeting. The ECB has been setting expectations for the eventual tapering of its QE program.

At this point, the market view is that Draghi and company will tell us their plans to extend the existing end date of QE, but with a methodical decline in the amount of assets they will be buying. Translation: It’s the beginning of the end of QE in Europe.

Why is that important? When the Fed (Bernanke) first uttered the words taper in May of 2013, U.S. yields went crazy – rising from 1.61% to 2.74% in two months, topping out just above 3% in the months following. Stocks were hit for about 8% in the month following the taper talk.

Could it happen in Europe? Likely. As we discussed yesterday, the 10 year yield there remains under 50 basis points, and 2 year government debt has a negative 70 basis points yield.

Will it hit stocks?

The world is in a different place now. And the ECB isn’t the Fed. But it’s safe to expect that there will be speculators with a finger on the trigger trying to sell stocks on an ECB taper theme, assuming that is discussed tomorrow.

With this in mind, ahead of tomorrow’s ECB meeting, we get this in stocks today…

You can see the trend break on this acceleration higher in stocks of the past two months. It wouldn’t be surprising to see stocks pull back a bit on these interest rate events. But any weakness on this type of speculation will be a nice opportunity to buy at cheaper prices in front of coming fiscal stimulus.

We’ve a lot about the positive outlook for stocks on a valuation basis, relative to historical ultra-low interest rate environments. And we’ve talked about the influence on valuation on a corporate tax cut – which will make stocks cheap.

Here’s a look at how stocks would look if we applied the long run average return of 8% to the pre-crisis peak (back in 2007). You can see the orange line, with the S&P growing at 8% annualized from the peak in 2007. And you can see the actual path for stocks in the blue line.

source: Billionaire’s Portfolio

Despite the nice run we’ve had in stocks, off of the bottom in 2009, we still have a big gap to make up (the difference between the blue line and the orange line)!

If you believe that the country will continue to innovate, become more efficient, productive and better, over time, as we have through history, and if you believe that we will ultimately return to long-term trend economic growth, then you believe that we’ll have hotter than average economic growth going forward. We have a catalyst for that: It’s fiscal stimulus.

And that hotter growth would argue for bigger than average stock market returns going forward, to put us back on the path of the long term growth rate in the S&P 500 – closing that gap in the chart above.

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