Getting better and betterer

There's certainly no denying that the bulls ruled Wall Street over the course of 2017 with its record breaking feat splattered all over the financial headlines one day after another.

Less focused on was the fact that the S&P 500, the DJIA and the Nasdaq all recorded only one down month for the entire year - a record in itself - and these, despite geopolitical concerns, the threat of Trump's impeachment and the US Federal Reserve slowly tightening the screws on monetary policy and expensive valuations.

At the end of 2017, the S&P 500 index's P/E ratio was 18.2 times - much more than its long-term average of 14.4 times - implying that it's around 27% overvalued. An article in The Economist magazine thinks it's greater: "The cyclically adjusted price-earnings ratio of the American market, which uses a ten-year average of profits, is 32.4; it has been higher only in September 1929 (just before the Wall Street crash) and during the dotcom bubble."

But if investors are hearing these alarm bells, they don't appear to be listening. The VIX index - the fear gauge - continues to trade at historic lows. It's fallen from an already low reading of 14.0 at the start of 2017 to 11.0 by the end of the year and is currently at 9.5.

And why not? There's Trump and his tax cuts. If the mere anticipation of it sent stocks rising in 2017, what more this year when it has become law? Just think of the many ways US corporations can do with the savings derived from paying less taxes - increase investment, pay for share buybacks, raise dividend payouts and lift wages. Mr. & Mrs. Jones are also getting tax reductions which, together with the expected lift wages, would increase disposable incomes and consumption.

These, taken together, spell stronger gains in company revenues and profitability and by extension, share prices.

Latest US data show that although employment increased by a less than expected 148,000 in December, this followed a very strong 252,000 gain in the previous month with the unemployment rate holding steady at a 17-year low of 4.1%.

Even better, the latest jobs report contained indication that wages are starting to pick up (at least at the margin). Average hourly earnings increased by 0.3% in the month of December after gaining 0.1% in November for its third consecutive month of improvement.

Although the year-on-year rate in wages remained glued at 2.5%, it might not be for long given the findings in the most recent Fed Beige Book report (November 2017) that showed widespread tightness in the labour market with "most Districts reported employers were having difficulties finding qualified workers across various skill levels."

Read more: Wall StreetS&P 500TrumpBeige BookDJIANasdaqP/EUS Federal ReserveVIX
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