@theMarket: Sweet Spot for the Markets
Thanksgiving weekend usually marks the beginning of a great seasonal run in the equity markets that continues through January of next year. There are some additional reasons why this year may prove to be a good one.
No one disputes the fact that we have had an unusual year for equities; all three U.S. indexes have gains in excess of 15 percent. That is more than twice the average gains of the S&P 500 Index on a historical basis. In addition, those spectacular gains have been accomplished without any declines of more than 3 percent all year. If that is not a record, it is pretty close to one.
The economy, unemployment and inflation have all been moving in the right direction. In addition, the nation's leading economic indicators are all pointing to further macro gains in the future. Earnings have been stellar for most of the year, while interest rates have remained at historically low levels. That makes investment alternatives to equities few and far between.
Investors are also waiting for an outcome to tax reform. The latest bets are that some kind of tax reform/cut will be on the president's desk before Christmas. At least that is what President Trump is tweeting. It is one of the main reasons why we have not seen anything more than a mild sell-off in stocks. Usually, investors would be busy combing through their portfolios after such a year of gains. The markets are up almost 25 percent since the election and normally professional investors would be locking in long-term capital gains. They would also be selling
losers, harvesting tax losses and rebalancing portfolios for the coming year. None of that is happening.
The reasoning is simple. Why take a chance on selling things now when next year there is a good chance that taxes will be lower. Better to wait at least until January before taking profits.
That way, even if tax reform does not take place until next year, investors will have until April 2019 to square up with the taxman.
In the meantime, equities are making new highs. Technically, the next stop is a little above 2,600 for the S&P 500 Index. So far this year, the most that can be said for past resistance areas, is that the indexes consolidated around the new levels and then forged higher. Given the seasonal impact of November through January, the upcoming Santa Claus Rally and the anticipation of tax reform, I would expect markets to continue to climb.
January may see a sell-off, but that all depends on what happens in Washington. If tax reform and tax cuts do materialize, then investors will celebrate. The lion's share of benefits of tax reform and cuts would accrue to large, stock market, listed companies. Savvy investors know that these companies will not be spending their new-found tax gains on investment and hiring.
They will do as they have done in the past and use that money to buy back stock and pay dividends to those who can afford to invest in the financial markets.
If for some reason tax reform/cuts fail to materialize than "look out below." Until then, enjoy the rally and have a Happy Thanksgiving.
@theMarket: Investors Underwhelmed by Tax Reform
With great fanfare, House Republicans rolled out a tax reform proposal that they promised would get this country going again and invigorate business, while creating jobs and huge savings for the middle class. What are they smoking?
Clearly, the entire reform package was simply a smoke screen to reduce taxes for American corporations with the majority of benefits directed at the country's largest companies. For the individual, depending on what you make and where you live, taxes will remain the same or go up.
Several legislators used a postcard as a prop claiming your individual tax return will be so simple it will fit on a postcard. The reason is simple. This plan will greatly reduce the few tax deductions we have left. State and local taxes will no longer be deductible, property taxes will be capped and a slew of other credits and deductions have been reduced or eliminated.
In my opinion what we have here is a classic distribution of wealth from the individual to the corporation. You may have noticed that while the GOP cut taxes on corporations permanently (from 35 percent to 20 percent); they did nothing to reduce or eliminate the mountains of tax credits, incentives and loopholes available to big business. If the truth be told, the effective tax rate of U.S. corporations, after taking advantage of these loopholes, is 12.6 percent. And that was before this proposed tax cut.
It doesn't take rocket science to figure out that if the Republican proposal passes, U.S. corporations could be effectively paying no taxes at all. The government may actually be paying them thanks to the various tax credits in place.
On another subject, a new Federal Reserve chairman has been selected. President Trump has bypassed Janet Yellen, a Democrat, for a second term. Instead, he has named Jerome Powell, a Republican and a "dove," who is not expected to rock the boat. He is reputed to be a "boring, predictable, Steady Eddie" who will maintain and continue existing monetary policy. This nomination was expected and telegraphed to the Street earlier in the week.
Friday's unemployment numbers (261,000 actual jobs created versus 310,000 expected) was a non-event since three hurricanes (Florida, Puerto Rico, Houston) will have skewed the numbers enough that the data cannot be relied upon to discern any kind of trend. What can be said is that the headline number on the unemployment rate is now down to 4.1 percent.
That historically low unemployment rate makes me wonder just who is going to fill all these new jobs that Republican politicians claim will be forthcoming as a result of their tax reform bill. As it stands, an increasing number of job vacancies around the nation can't be filled because the country lacks the skilled labor force that can qualify for these high-paying jobs.
Most of what I have seen thus far in new job growth coming out of the U.S. corporate sector is minimum wage jobs in the service industry. This week's data showed additional gains in the food service industry (think waiters and waitresses) and drinking places (bartenders). Wage growth was flat.
Like most market participants, the news out of Washington seems to be nothing more than a feeble attempt by the House to resuscitate the "Trickle Down" economic fairy tale of yester year. This tired myth has been soundly discredited over the last four decades.
Most corporations will simply pass on these new tax savings to shareholders or buy up assets rather than invest in their companies or employees. As for the markets, the S&P 500 Index has been trapped in a trading range for almost two weeks now. Look for the index to attempt a breakout soon to 2,600 or more.
@theMarket: Markets Are Waiting for Tax Reform
Stocks gyrated up and down this week as events in Washington competed with quarterly earnings results for investor's attention. Next week, we should find out more about both.
True to form, third-quarter earnings results have been in-line or better than expected. Over 70 percent of companies have "beat" earnings estimates, which is no surprise. Sales and earnings guidance have also been upbeat. For those unfortunate corporations who "missed" their targets on either the top or bottom line, retribution was swift and dramatic.
Some companies saw their stock price plummet 20 percent or more. And we are not just talking about penny stocks. Some mega-cap biotech names, for example, were taken to the woodshed and are still falling in price days later. On the other hand, some technology stocks, including the big momentum names such as the so-called "FANG" stocks saw their shares skyrocket on Friday as results more than beat analyst's estimates.
In the background, legislators in our nation's capital continued to march forward in their plans to cut and reform taxes. The House passed the Senate's version of the budget this week. That was a preliminary but necessary move that now allows tax reform to move forward through Congress with a simple majority vote.
No Democrats voted for the budget and some Republicans also abstained. The budget still passed, but by a slim majority. The political maneuvering behind the vote gave many investors the impression that next week's tax plan would not be as simple to pass as some might expect. However, traders are still giving Congress the benefit of the doubt, at least until next
Wednesday when the tax plan will be unveiled.
In the meantime, global markets are waiting with baited breath for President Trump to announce who will head the nation's central bank. Obviously, it is an important (some might say critical) job. Depending upon who you talk to, the front-runners are Jerome Powell, a Fed governor, who is thought to be in tune with current Fed policy under Chairwoman Janet Yellen.
John Taylor, a Stanford University economics professor, is the other candidate. He is a darling of conservative Republicans given his belief that the economy would generate stronger growth if the Fed would just get out of the way. However, Yellen is not out of the running just yet, since Trump said he still liked Yellen "a lot" for a second term. This week he said the decision was "very, very close."
The world's central bankers are on pins and needles as well, since much of monetary policy in the recent past has been a joint effort. This week, for example, Mario Draghi, the head of Europe's central bank, signaled that Europe would follow the lead of the U.S. central bank over the next year or so in throttling back its own stimulus of the European Union's economies.
Careful, steady, coordinated progress by central banks has been made in guiding the world's economies out of the financial crisis and Great Recession. Investors worry that a newcomer to the Fed chairmanship's job, especially one with different views, might rock the boat.
As for the markets, investors worry that at some point soon, the indexes will have to correct. There is an inescapable logic to that argument. But exactly when that will occur no one knows. In the meantime, stay invested.
@the Market: Markets Need a Time Out
The S&P 500 Index has gone up eight straight days. The other averages have done the same thing. That hasn't happened since 2013. It's time for a break.
It appears that stocks are in "melt-up" mode. That's a term we financial geeks use to describe an unrelenting rise in equity prices. Consider it an investor stampede where the fear of missing out on even higher prices creates a buying frenzy.
There are some fundamental reasons for the market's rise. The economy appears to be chugging along. Interest rates remain low while inflation continues to bump along the bottom. This Friday's payroll numbers were a disappointment to most. For the first time since 2010, the U.S. economy lost jobs in September. While the unemployment rate dropped to 4.2 percent, America also lost 33,000 jobs. It doesn't take rocket science to figure out why. Remember Hurricanes Harvey and Irma? Of course the nation lost jobs as whole businesses were flooded or blown away in sections of the country.
But at the same time, readers know that what I look at in each report is wage growth. That tells me how American workers are doing and where spending is going in the months ahead. And remember, consumer spending, which accounts for 70 percent of GDP, is key to the future health of the economy. Good news — wages jumped sharply higher last month, rising 0.5 percent over the August numbers and 2.9 percent over the prior year.
But the real reason investors are celebrating was the Republican-controlled House move to pass its 2018 budget resolution. In a 219-206 vote, the House of Representatives approved a budget resolution that sets up a process for shielding the GOP tax bill from a filibuster in the Senate. As such, it moves the president's tax reform proposal that much closer to passage this year. That gave Wall Street a new jolt of energy.
In addition, we are once again heading into earnings season starting next week. Remember that first-quarter earnings grew by 14 percent followed by a 9 percent gain in the second quarter. Third quarter earnings forecasts are all over the place: anywhere from a 4 percent gain to over 10 percent.
In my opinion, earnings are what really drive the stock market in the long term. The better they are, the higher the market will go. As such, earnings results could be a critical element in where the stock market goes from here.
If we do get double digit growth in earnings and at the same time it appears that tax reform will actually happen this year, then the markets will likely experience a "blow-off" surge that could be really spectacular. On the other hand, if earnings are just so-so, expect the market to regroup. Notice I didn't say fall precipitously.
The risk/reward is still with the bulls in my opinion. Even if earnings disappoint, a decline would simply be another excuse to buy the dip. So given the odds of a minor (5-7 percent pullback) and a blow-off rally that could extend for another few months, does it make sense to sell?
@theMarket: NK Missile Dud on Wall Street
The North Korean boy who cried wolf is alive and well, but seems to have less and less impact on financial markets. Kim Jong Un's minions launched another missile over Japan on Thursday night and the markets simply yawned.
Geopolitics are always a risk for the financial markets. For one thing, they are by definition unpredictable. Rarely do the antagonists worry about the economic and financial ramifications of their moves. As such, markets react quickly, but usually the impact only lasts for a short period of time.
It seems that even our tweet-happy president is learning that, in this case, Kim Jong Un, the boy in the wolf's mask, has a bark that is far worse than his bite. Have you noticed that none of those missiles hit anything? That is not by accident. Unlike the majority of Americans, I do not think Kim is either a madmen or stupid. Far from it. I believe he is a calculating despot whose single-minded purpose is to attain a seat at the table among the world's nuclear power brokers.
His missile tests are intended to do just that. He needs to demonstrate to the world that not only does he have the capability to manufacture nuclear bombs, but also the ability to deliver them in a consistent manner. His scientists and military, aided and abetted by technology from other nations, will continue firing missiles into the sea and testing nuclear devices underground
until the world is convinced that he can do it. Only then, with a seat at the table as an equal, will Kim be willing to negotiate.
While North Korea and a bomb blast on the London subway occupy investors today, what moves markets in the medium and long-term are economics, tax reform (think cuts) and to a lesser extent, the recovery of weather-torn Texas and Florida. The good news is, now that the floods and rain have subsided, investors are trying to figure out what the aftermath of Irma and Harvey will have on the economy.
Clearly, $300 billion in damages will take a dent out of the economic growth rate over the coming months. However, the need to rebuild, with all that entails will provide a boost to GDP down the road. So, as analysts are busy crunching those numbers, a new atmosphere of bipartisanship is giving hope to investors that something — anything — might be done by our lawmakers before the end of the year.
Granted, Donald Trump, the self-professed deal maker par excellence, has been a bit slow on the uptake, he is finally realizing that there are two parties in Congress. Since he has not been able to make much headway with the various splinter groups that is called the Republican Party, he has turned to the Democrats to further his agenda.
And his present agenda is tax reform. Readers are aware that I personally do not hold out much hope for the long-promised, much-needed (but never enacted) reform of our byzantine tax system. A far easier proposition is to cut taxes. After all, our politicians have a long history of cutting taxes one year and raising them the next. Tax cuts won't convince corporations to invest or spend more. The economy won't take off because of them either, think of it as an election bribe, most likely enacted just before the mid-term elections next year.
As for the markets, the good news outweighs the bad, thus the minor new highs we are enjoying in September. I suspect we will inch up a little further in the short term but markets will continue to remain volatile for the remainder of the month. Keep invested.