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Dr. Ed Yardeni

Dr. Ed Yardeni

Dr. Ed Yardeni is the President and Chief Investment Strategist of Yardeni Research, Inc., a provider of independent investment strategy and economics research for institutional investors. In this blog, we highlight some of the more interesting relationships and developments that should be of interest to investors. Our premium research service is designed for institutional investors.

Articles by Dr. Ed Yardeni

The Fed: Rooting for Higher Inflation

9 days ago

While the financial markets have started to worry about a reflation scenario, Fed officials continue to hope that inflation will rise in 2018 to hit their target of 2.0% for the core PCED rate. It was 1.5% last year on a December-to-December basis.
The minutes of the January 30-31 meeting of the FOMC were released on February 21. The word “inflation” was mentioned 129 times. The word “unemployment” was mentioned just 13 times. However, that doesn’t mean that Fed officials are worrying about higher inflation. Rather, they seemed to spend most of their time on the subject trying to convince one another that it should rise back up to 2.0% this year now that the economy is at full employment.
In my new book, Predicting the Markets: A Professional Autobiography, I note that the FOMC has a

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Smoot-Hawley Triggered the Great Depression

13 days ago

The following is an excerpt from my new book, Predicting the Markets. It seems especially relevant after President Donald Trump raised tariffs on imports of solar panels and washing machines during January, and is planning on raising tariffs on aluminum and steel imports this week:

[T]he 1920s was a period of globalization, with peace, progress, and prosperity. Yet by the early 1930s, the world fell into a depression that was followed by World War II near the end of the decade.
My research led me to conclude that the Great Depression was caused by the Smoot–Hawley Tariff Act of June 1930. During the election of 1928, Republican candidate Herbert Hoover promised US farmers protection from foreign competition to boost depressed farm prices. However, he was appalled by the breadth of

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Dr. Ed’s New Book

14 days ago

I started my career on Wall Street in 1978. Ever since then, I have been thinking and writing about the economy and financial markets as both an economist and an investment strategist. While I have a solid academic background to be a Wall Street prognosticator, I learned a great deal on the job. In Predicting the Markets: A Professional Autobiography, I share my insights into forecasting the trends and cycles in the domestic and global economies and financial markets—including stocks, bonds, commodities, and currencies. Please visit the book’s home page to learn more about it.

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Dow Vigilantes

16 days ago

The Tax Cut and Jobs Act’s (TCJA) cut in the corporate statutory tax rate at the end of 2017 will send earnings hurtling beyond the Earth’s gravitational pull this year into outer space.
They were heading in that direction last year. It’s conceivable that some of last year’s earnings extravaganza was attributable to the Trump administration’s easing of regulatory costs. More likely is that 2017 earnings were boosted by the synchronized global economic expansion that followed the worldwide energy-led global growth recession from 2014 through 2016. I started to see signs of a global recovery during the summer of 2016, which led me to conclude that stock prices were likely to head higher no matter who won the presidential race on November 8, 2016. Trump won on his campaign promise to

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Soarin’ Fundamentals for Stocks

23 days ago

I spent the long President’s Day weekend with my family in Disney World. It was the first time that my four-year-old granddaughter Cecelia (a.k.a. “CeCe”) attended the theme park. The park’s staffers are trained to say “Have a magical day” whenever they greet visitors. Cece had a magical weekend, and so did the rest of my family. The weather was great, and my wife wisely obtained FastPass+ reservations for most of the rides. We particularly enjoyed a trip around the world on Disney’s flight simulator, Soarin’.
Back on Earth, stock investors have enjoyed a magical bull market since March 2009. It was particularly magical during 2017, when the S&P 500 rose 19.4%. Such a double-digit return is quite extraordinary for an aging bull market going on nine years old in 2018. The magic seemed

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Liquidity Legends

26 days ago

The latest and previous stock market corrections could be described as “tightening tantrums.” Investors fretted that the Fed would be raising interest rates faster than had been widely perceived. That was not the case in 2016, when the federal funds rate was raised but only once at the end of the year. There were three widely expected rate hikes in 2017. At the start of this year, investors were anticipating three more rate hikes prior to the release of the wage numbers on February 2.
For stock investors, concerns about the rate hikes during 2017 were more than offset by strong earnings growth attributable to improving global economic growth. The recent correction occurred despite the huge boost to earnings provided by the Tax Cut and Jobs Act (TCJA) at the end of last year. The

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Outlook for Stocks Remains Fundamentally Strong

February 6, 2018

Whatever might be the short-term follow-up (or -down) on Friday’s and Monday’s drop, I remain bullish because the outlook for earnings remains very upbeat. Industry analysts have raised their consensus S&P 500 earnings estimate for 2018 by $9.00 per share over the past seven weeks to $155.26 during the week of February 2. That’s mostly on guidance provided by managements during January’s Q4-2017 earnings season about the very positive impact of the corporate tax cut enacted late last year. The actual Q1 earnings season is still ahead, starting in April. By then, corporations are likely also to report that the weak dollar (down 7.7% y/y) has boosted their earnings.
Nevertheless, the latest panic attack isn’t about corporate earnings. Rather, the fear is that wage inflation is making a

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Fueling the Bull Market

December 14, 2017

As the stock market continues to soar, it is attracting more money into stocks. That’s what usually happens during meltups. I think the market may be in the early stages of a meltup. I will call it a “meltup” if my 2018 year-end target of 3100 for the S&P 500 is reached within the next 3-6 months rather than the next 12-18 months. To some observers, reaching 3100 by the end of next year may appear to be a meltup since it would mean that the S&P 500 would have risen 51.7% over the three years 2016-2018.
Maybe so, but let’s see whether earnings continue to rise rapidly, providing fundamental support for the stock gains so far and in the year ahead. A cut in the corporate tax rate, effective next year, along with continued deregulation should bolster profits. So should a continuation of

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Proprietors’ Income Matters

December 7, 2017

Almost always ignored in discussions of corporate profits is proprietors’ income, which is included in personal income on a pretax basis. It is up 2.7% y/y and in record-high territory. A comparison with pretax corporate profits shows that proprietors’ income recently has approximated 60% of corporate profits. Here are some definitions from the National Income and Product Accounts:

(1) “Nonfarm proprietors’ income measures the income, before deducting income taxes, of sole proprietorships, partnerships, and other private nonfarm businesses that are organized for profit but that are not classified as corporations. Sole proprietorships are businesses owned by a single individual. Partnerships include most associations of two or more of: individuals, corporations, noncorporate

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Corporate Taxes: Facts vs Fiction

November 29, 2017

In the realm of economics, there are lots of theories. There are also lots of urban legends. Both are often propagated despite lots of facts that question their credibility. Daniel Patrick Moynihan, the former senator from New York, once said, “Everyone is entitled to his own opinion, but not to his own facts.” In today’s world of “fake news,” sorting out fact from fiction is a challenge. In the realm of economics, there’s no shortage of data, which can be very helpful in discerning the difference between information and disinformation.
Which brings me to the subject of the US corporate tax rate, which Republicans are aiming to cut. The widespread view, especially among Republicans, is that the corporate tax rate is too high. They aim to pass a tax reform package before the end of the

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Happy Days for US Consumers

November 1, 2017

We live in happy times. How can that be given all the unhappy happenings in DC these days? Apparently, we are all tuning out the political static and focusing on what matters most: jobs. While our politicians continue to promise policies that will create more jobs, we are doing just that despite Washington. As a result, consumer confidence is soaring. Consider the following happy developments:
(1) Consumer confidence. Both the Consumer Sentiment Index (CSI) and the Consumer Confidence Index (CCI) jumped in October. I focus on the average of the two, which we call the “Consumer Optimism Index” (COI). During October, the overall COI jumped to 113.3, the highest since December 2000. Its current conditions component rose to 133.8, the highest since March 2001, while its expectations

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Message to Buffett: Thanks a Million!

October 4, 2017

Among the various stock market valuation gauges, Warren Buffett has said he favors the ratio of the value of all stocks traded in the US to nominal GNP, which is nominal GDP plus net income receipts from the rest of the world. The data for the numerator is included in the Fed’s quarterly Financial Accounts of the United States and lags the GNP report, which is available a couple of weeks after the end of a quarter on a preliminary basis. Needless to say, it isn’t exactly timely data.
However, the S&P 500 price-to-forward-revenues ratio (a.k.a. the price-to-sales ratio), which is available weekly, has been tracking Buffett’s ratio very closely. In an interview with Fortune in December 2001, Buffett said: “For me, the message of that chart is this: If the percentage relationship falls

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Janet in Wonderland

September 26, 2017

Borio vs Yellen. Last Wednesday, Fed Chair Yellen, in her press conference following the latest FOMC meeting, reminded me of Alice in Wonderland. She wondered why inflation remained so curiously low. In the world that she knows, ultra-easy monetary policy should stimulate demand for goods and services, lower the unemployment rate, and boost wage inflation, which would then drive up price inflation.
Since the time Yellen became Fed chair on February 3, 2014 through today, the unemployment rate has dropped from 6.7% to 4.4% (from February 2014 through August 2017). Yet over that same period, wage inflation has remained around 2.5% and price inflation has remained below 2.0%. Yellen expected that by now wages would be rising 3%-4%, and prices would be rising around 2% based on the

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Valuation Debate: Shiller vs. Goldilocks

September 20, 2017

The valuation question has been hanging over the current bull market. Valuation ratios such as price/earnings, price/sales, and market capitalization/revenues are uniformly bearish, showing that stocks are as overvalued as they were just before the tech bubble burst in 2000. On the other hand, valuation measures that adjust for inflation and interest rates, both of which are near record lows, suggest that the market is fairly valued. They are mostly in the Goldilocks range: Not too cold, and not too hot. I have been siding with Goldilocks.
Not surprisingly, Yale Professor Robert Shiller strongly disagrees with Goldilocks. He is issuing dire warnings that stocks are as grossly overvalued as they were in 2000. The man won the Nobel Prize in economics, so he must know something. He won

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Another Seinfeld Episode for Stocks

September 14, 2017

The panic-prone bull market in stocks since 2009 has been less panic-prone. The bull turned a bit anxious again last week as Hurricane Irma threatened to level all of Florida after Hurricane Harvey swamped all of Houston and surrounding areas. Irma did lots of damage, but so have previous hurricanes without any consequences for the US economy and stock market. There was also some lingering anxiety about geopolitical tensions with North Korea. However, for now, the US continues to seek nonlethal options, particularly more UN-imposed trade sanctions. Immediate worries about the US federal debt ceiling vanished last Wednesday, when President Donald Trump cut a deal with congressional Democrats to raise the ceiling for three months and agreed to provide emergency funds for Texas and

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Global Synchronized Growth: Why Now?

September 7, 2017

The global economy is running on all six cylinders. It may not be a global synchronized boom, but it is the most synchronized expansion of economic activity that the global economy has had since the recovery from the 2008/2009 recession. The direction of change can be seen in the titles of the past four issues of the International Monetary Fund’s World Economic Outlook: “Subdued Demand: Symptoms and Remedies” (Oct. 2016), “A Shifting Global Economic Landscape” (Jan. 2017), “Gaining Momentum?” (Apr. 2017), and “A Firming Recovery” (Jul. 2017).
Why is this happening now? The global synchronized expansion may be attributable to the plunge in the price of a barrel of Brent crude oil from a 2014 peak of $115.06 on June 19 to a low of $27.88 on January 20, 2016 followed by the recovery to

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Stocks Are Fundamentally Sound

August 30, 2017

The stock market has been like the Starship Enterprise on “Star Trek.” It continues to “boldly go where no man [or woman] has gone before.” The S&P 500 has been setting new record highs with only two significant corrections since March 28, 2013, when it was 1569.19. It is up 58.5% since the prior bull market record high as of the most recent record high of 2480.91 set on August 7.
In other words, it has been 1,594 days in outer space. During the previous bull market of the 2000s, it was in outer space (i.e., exceeded the previous bull market record high) for only 133 days. Granted, the air is thin in outer space, as measured by various valuation gauges. However, there’s no gravitational pull either, so the Starship S&P 500 can continue to fly as long as it doesn’t run out of rocket

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S&P 500 Earnings: The Shining

August 24, 2017

The earnings recession is over. S&P 500 operating earnings per share were eclipsed by the energy recession from Q4-2014 through Q2-2016, when the Thomson Reuters (TR) measure was flat to down on a y/y basis. Growth resumed during the second half of 2016 and first half of 2017.
The TR measure of earnings rose 10.1% y/y during Q2-2017 to a new record high, while revenues rose 5.7% y/y.
That put the S&P 500 operating profit margin (based on TR data) at a record high of 10.8%. “Ouch” is the sound you just heard from all those reversion-to-the-mean bears, who can go back to sleep. The 52-week forward outlook looks outstanding:
(1) S&P 500 forward revenues per share, which tends to be a weekly coincident indicator of actual earnings, continued its linear ascent into record-high territory

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Four Deuces Scenario

August 8, 2017

While real GDP growth continues to amble along at a leisurely pace of 2.0% y/y, the labor market is sprinting at a fast pace. In the 7/31 Morning Briefing, I described my 2-2-2 economic scenario, with real GDP continuing to grow around 2.0% y/y, inflation remaining at or slightly below 2.0%, and the federal funds rate peaking late next year at 2.00%.
One of my accounts suggested the Four Deuces (2-2-2-2) scenario, adding the unemployment rate to the Three Deuces scenario. The jobless rate was 4.3% during July and could fall to 2.0%, which would be the lowest on record starting in January 1948. The low for this series was 2.5% during April and May 1953. A new record low, even at 2.0%, is conceivable if the Three Deuces scenario, continues to play out. That’s because having slow economic

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Investors Hearing Call of the Wild

August 2, 2017

The Call of the Wild is a short adventure novel by Jack London. It was published in 1903 and set in Yukon, Canada during the 1890s Klondike Gold Rush. The central character of the novel is “Buck,” a large and powerful, but domesticated, St. Bernard-Scotch Shepherd dog. Buck is stolen from his home at a ranch in Santa Clara Valley, California, and sold to be a sled dog in Alaska. He becomes increasingly wild as he is forced to fight to survive and dominate other dogs. By relying on his basic instincts, he emerges as a leader in the pack.
This story seems to portray current developments in the White House and, more broadly, in Washington, DC. It also captures the essence of what we may be starting to see in the stock market. Following the stock market debacles of the early and late

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Summertime Lullaby

July 23, 2017

“Summertime” is the aria in the opera Porgy and Bess (1935) composed by George Gershwin. The song became a popular and much-recorded jazz standard, with more than 33,000 covers by groups and solo performers. During these hot summer days, I sometimes like to listen to Ella Fitzgerald sing: “Summertime, and the livin’ is easy. Fish are jumpin’, and the cotton is high. Oh, your daddy’s rich, and your ma is good-lookin’. So hush little baby, don’t you cry.”
For stock investors, the living has been relatively easy since March 2009, when this great bull market started. It would have been far easier if we all fell asleep since then and just woke up occasionally to make sure we were still getting rich. There have been plenty of reasons to wake up crying. But the bull kept singing a lullaby

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China: The Xi Dynasty’s Debt Extravaganza

July 19, 2017

China’s real GDP rose 6.9% y/y during Q2. During the quarter, it rose 6.7% (saar), which it’s been hovering around since the end of 2013. That’s a slowdown from the 10%-plus pace that was the norm in the years prior to the global financial crisis of 2008 and for a couple of years afterwards. Nevertheless, China’s growth rate is impressive compared to those in most other countries in the world. Even more impressive is how much credit it is taking to prop up China’s growth. Of course, this isn’t impressive in a positive way, since economic growth financed by excessive debt often ends badly.
Nevertheless, I am not among China’s doomsayers. I don’t want to bet against over a billion Chinese people who are mostly hard-working, entrepreneurial, aspirational, and materialistic—kind of like

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Stocks: Still Fundamentally Good

July 10, 2017

The latest ascent into record-high territory for the S&P 500, with historically high P/Es, naturally has raised fears of a correction, or worse. It seems to me that the market is doing a very good job of correcting internally on a regular basis without giving up the high ground. The latest example is the recent selloff in technology stocks and rebound in financial ones. That might continue without triggering a market-wide selloff.
Meanwhile, two of my favorite weekly fundamental stock market indicators continue to support the bull market trend. Here is an update:
(1) My Boom-Bust Barometer (BBB) is simply the ratio of the CRB raw industrials spot price index and weekly initial unemployment claims. It remains in record-high territory, with a whopping y/y gain of 21%.
(2) My Fundamental

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US Corporate Finance: Show Me the Money

July 6, 2017

S&P 500 operating earnings totaled $958 billion over the past four quarters through Q1-2017, with buybacks and dividends accounting for 95% of this total. The dividend payout ratio of the S&P 500 remains around 50%. This implies that corporations are spending all their extra cash on buybacks rather than capital spending and wages.
The problem with this widely circulated myth is that profits are not the same as cash flow. The latter is equal to retained earnings (i.e., after-tax profits less dividends) plus the depreciation allowance. When we add the cash flow plus net bond issuance of nonfinancial corporations (NFCs), the resulting series is more often than not very close to capital expenditures plus buybacks. Here are a few round numbers for 2016 based on data compiled in the Fed’s

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Global Demography: Birth Dearth & Urbanization

June 28, 2017

The Voluntary Human Extinction Movement (VHEMT) was founded in 1991 by Les U. Knight, a high-school substitute teacher who lives in Portland, Oregon. He and his followers believe that human extinction is the best solution to the problems facing the Earth’s biosphere and humanity. The VHEMT website shows that the group’s motto is “May we live long and die out.” Their Facebook page sells tee-shirts declaring: “When You Breed, the Planet Bleeds.” Another declares: “Thank You for Not Breeding.” Sure enough, the pace of human breeding has slowed, but for reasons that have nothing to do with VHEMT.
All around the world, humans are not having enough babies to replace themselves. There are a few significant exceptions, such as India and the continent of Africa. Working-age populations are

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Drowning in Oil

June 21, 2017

OPEC oil producers continue to put a lid on their output in an effort to prop up prices. Yet the price of a barrel of Brent crude oil is back down to $45.89, below its recent high of $57.10 on January 6. That’s comfortably in the $40-$50 price range that I have been expecting for this year. Despite the 76% plunge in the price of oil from June 19, 2014 to January 20, 2016, US crude oil production fell just 12% from the week of June 5, 2015 through the week of July 1, 2016. Since then, it is up 10% to 9.3mbd.
Interestingly, weekly production held up relatively better in Texas and North Dakota than in the rest of the country when total output was declining. However, the rebound in US oil production has been led by the rest of the country, excluding Texas and North Dakota. Could it be that

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Tech Now and Then

June 15, 2017

Is it 1999/2000 all over again for the S&P 500 Information Technology sector? Not so far. Consider the following:
(1) First vs third place. During the bull market from October 11, 1990 through March 24, 2000, the sector soared 1,697.2%, well ahead of the 417.0% gain in the S&P 500 and all the other sectors. During the current bull market, it is in third place with a gain of 379.8% through last Friday.
(2) Market-cap and earnings shares. At the tail end of the bull market of the 1990s, the S&P 500 IT sector’s share of the overall index’s market capitalization rose to a record 32.9% during March 2000. However, its earnings share peaked at only 17.6% during September 2000. This time, during May, the sector’s market-cap share rose to a cyclical high of 22.9%, while its earnings share, at a

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Hannibal Spirits: S&P 500 Climbing Mountains

June 8, 2017

Hannibal, the Carthaginian general, was one of the greatest military
strategists of all times. The city of Carthage in ancient Roman times was in the spot of modern-day Tunis, in Tunisia. Hannibal was so feared by the Romans that a common Latin expression to express anxiety about an impending calamity was “Hannibal ante portas!,” which means “Hannibal is at the gates!” He studied his opponents’ strengths and weaknesses, winning battles by playing to their weaknesses and to his strengths.
One of Hannibal’s most remembered achievements was marching an army that included war elephants over the Pyrenees and the Alps to invade Italy at the outbreak of the Second Punic War. He occupied much of Italy for 15 years but was unable to conquer Rome. A Roman general, Scipio Africanus,

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A Memorable Earnings Season

May 31, 2017

Q1 revenues, earnings, and margins are now available for the S&P 500. Revenues per share dropped 2.7% q/q during Q1. Earnings per share, based on Thomson Reuters I/B/E/S (TR) data, fell 1.3% q/q. So in what sense was the Q1 reporting season “memorable,” as stated in the title of today’s commentary?
For starters, the S&P 500 rose to a new record high of 2415.82 on May 26. The S&P 400 and S&P 600 stock price indexes continued to mark time at their recent record highs. Industry analysts remained upbeat about earnings for this year and next year, as reflected by the record highs in the S&P 500/400/600 forward earnings.
This all happened despite a growing realization that President Trump’s economic agenda is likely to be slowed by Washington’s swampy ways. I came to that epiphany on May

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Valuation: A Less Miserable Measure

May 24, 2017

Almost all valuation multiples are flashing that stocks are dangerously overvalued. Are there any valuation models suggesting that the danger signals might be false alarms? There is one. It shows the inverse relationship since 1979 between the S&P 500 forward P/E and the Misery Index, which is the sum of the unemployment rate and the CPI inflation rate. Let’s have a look at it and compare it to a few of the other valuation indicators:
(1) Misery Index very bullish. During April, the Misery Index was down to 6.6%, near previous cyclical lows. That’s down 6.3ppts from its most recent cyclical peak of 12.9% during September 2011. Over this same period, the forward P/E has risen from roughly 10 to 17, well above its average of 13.8 since September 1978.
The theory is that less misery

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