Local investment analysts see 'clouds forming on horizon'

President Donald Trump, the virtual elephant on the stock-market floor, claimed credit for its rise since his election in November 2016.

And as he has denounced trade deals, threatened trade wars and attacked Amazon, he has put himself at the center of the downturn as well.

Yahoo Finance launched a new video feature recently entitled, "This Week in Trumponomics."

Last week, the S&P 500 index of America's largest companies fell 9 percent from its January highs. More than half the 69 publicly traded Minnesota stocks worth more than $2 per share are trading in negative territory this year.

Some analysts believe stocks should be higher after December's corporate tax cuts and a good 2018 earnings outlook.

However, after Trump's trade threats last week, the market tanked.

That's even after Trump's new economic adviser, Larry Kudlow, suggested the president's pronouncement may just be a negotiating ploy.

Traders can make and lose a fast buck in a second or a day betting Trump on China, Amazon, NAFTA or otherwise.

"Much of the short-term volatility created by Trump … just creates market noise washed away in a few days or weeks," said Jim Paulsen, the veteran economist and market strategist at the Leuthold Group. "Self-made government crises may make for very entertaining reality TV but they probably serve only to lead you in a bad direction when considering the best investment approach.

"The real driver over time is still fundamentals — values, financial health, pace of economic and earnings growth and inflation and yield pressures — and that is what [long-term] investors should focus on to make the best judgments."

Economic fundamentals are good. The stock market, an economic harbinger, has had a historic run.

The S&P 500 rallied from under 800 in March 2009 to more than 2,100 before Trump's election in November 2016. That's about 160 percent, not including dividends. It's up more than 20 percent since Trump's election.

The bank's year-end S&P 500 target price of 3,000 is based on a price-to-earnings multiple of about 20 times expected aggregate earnings in 2018 of $155 per share. That's pricey, but shy, of the P-E ratio before the 2001-02 tech bubble collapse.

Paulsen pointed out that the so-called "Markets Message Indicator," a good barometer of market direction for 40-plus years, is trading at a very high level.

That indicates high tension in the bond, currency and commodity markets and is not good for stock prices.

The good news: Savers should soon be getting 2 percent or more on their deposits and money market accounts.

Unemployment is historically low and wages are starting to grow.

"The economy is healthy, employment is expanding, and, very importantly, companies are starting to spend money on plant, property, equipment and their employees. Investors should focus on the long-term fundamentals of companies and valuations.

"We continue to believe that the markets will be volatile in 2018 and that investors should not expect much more than single-digit returns from their portfolios. Interest rates are increasing and midterm elections are six months away, both of which will add more volatility to the stock market."

Paulsen and some other analysts would not be surprised by a market correction that gets to 15 percent from January highs.

Higher costs and labor shortages are starting to hit some companies in significant ways.

For example, General Mills, has fallen nearly a quarter in value this year, thanks partly to a jump in transportation costs.

Shares of General Mills dropped 9 percent when the Golden Valley-based global food marketer and manufacturer disclosed third-quarter results and worse-than-expected operating profits on March 21.

Todd Hedtke, chief investment officer at Allianz Life North America, ticked off a list of positives in the economy, from the tax cuts to the global expansion that finally kicked in after Europe and others stimulated their economies a few years ago.

"While I am not calling the top of the market, nor foreseeing an immediate bear market on the horizon, I am increasingly concerned about economic news being 'too good' and clouding investors' vision of the potential risks that may be lingering," Hedtke said. "As the old saying goes, 'The time to buy an umbrella is not when it has already begun to rain, but rather when the sky is still blue.'

"I caution that while the sky may appear blue right now as growing global economies are supported by strong fundamentals, clouds are forming on the horizon. Just like the weather, market conditions can and do change quickly."

Henneman sees no reason to move off his prediction in December that the S&P 500 Index would finish this year around 2,700, basically flat.

Much of the good economic and earnings news already was priced into stocks.

Neal St. Anthony • 612-673-7144