Rising interest rates are going to be a disaster for most no matter the nation simply because the amount of both government and consumer debt outstanding is at record highs.  For the average household even a $100 monthly increase in interest must come at a loss to another part of the economy, whether it Tim Hortons or travel.  While painful for most, it will be welcomed by savers who will earn a higher return.  After all, it is the saver who is responsible for investment across the economy.

American stock markets are in record expensive territory based on profits which, to the surprise of most investors, have been declining for six quarters.  Earnings are now below what they were two years ago on the Dow Jones.  Likewise, profits for the S&P 500 are currently $9.08 per share compared to $10.47 in December 2014.  This is after record share repurchasing by companies which increases the earnings per share.  There is no way corporate earnings will grow if Trump carries out his campaign promises. If anything, it is going to scare capital away. Even huge tax cuts cannot justify today’s valuations.   

The Dow Jones Industrial Average broke 19,000 for the first time in November.   The index is the second most overvalued in its 97 year history, based on corporate earnings.  Until the beginning of this century the average price earnings ratio averaged around 13 times.  This century it is now close to 16 times earnings due to low interest rates.  Today, the price earnings ratio is at 21.5 times.  Earnings are lower than they were two years ago.  Based on current earnings, the stock market is saying that profits are set to double over the next 3.6 years.  This will not occur.

For the stock markets, they are vulnerable to sizeable correction just to get down to normal.  There is absolutely no reason for their current activity.  Companies are stockpiling cash and very few are investing significant amounts of money.  A common practice today among companies is purchasing their own shares.  This improves the earnings per share, the most favoured metric on Wall Street,  since there are fewer shares to spread the profits across.   More importantly, earnings are falling behind and interest rates are rising leaving stock markets in very expensive territory. 

For us in Canada, as has been the case for the past couple of years, dividend income will be the main source of investment returns.  The TSX is trading at around the same level as two years ago.   We expect more of the same for 2017 because there is no reason for markets to climb.  There will be no change until Ottawa decides to walk the talk.

For months we have stressed keeping the majority of one’s investment monies within Canada.  We maintain this stand.  Stock markets are going to be extremely volatile until profits improve and Trump has been in power, allowing the world to properly assess his governing of which they will most likely disapprove.  The markets are overvalued and require a 35% decline to bring them in line with this century's average price earnings. Continue to favour cash and collect those dividends.