@theMarket: Look! Up in the Sky! It's a Bird ... It's a Plane ... It's the Stock market!
The Dow Jones Industrial Average gained a thousand points in a month. In just the first three days of 2018, all three U.S. averages hit consecutive record highs. Overseas indexes did even better.
Japan, for example, was up more than 3 percent on its first trading day of the year. Emerging markets continue to make new highs, while European bourses continue to climb. Those who expected the markets to tank in the New Year have thus far been wrong. How long can this last?
Short sellers, convinced that stocks just have to come down, bet on a market decline and have had their head handed to them on a daily basis. Undeterred, they point to the "overbought" indicators that have been flashing red for weeks now. Investor sentiment numbers continue to climb to nose-bleed levels as well, which is usually a contrary indicator. Still, the markets climb higher.
There is an old saying among traders that "the markets can remain irrational, longer than you can remain solvent." It is something that all investors should not forget. We are experiencing a melt-up and if one is on the bull train, remain on it. If, on the other hand, you still have that yearly cash bonus, practice a little patience. There will come a time when you can put that new money to work, just not quite yet.
We are in a period of goldilocks-type conditions that one rarely sees in the stock market. We have low, even historically low, interest rates given the growth rate of the global economy. Negative interest rates in a large part of the world are coupled with accelerating growth. At the same time, the U.S. economy, which has been growing moderately, may now get a new burst of energy thanks to the newly-passed tax reform. If our Twitterer-in- Chief is correct, the $1.5 trillion in tax cuts for one and all will create a robust environment for additional consumer spending as well as capital investment.
The U.S. could therefore act as a speeding locomotive pulling the rest of the world's economies along at an ever-increasing rate. It is similar to what happened back in the early 2000s when China's economy exploded. Almost every nation on earth benefited from that economic miracle. Some think this could happen again, only this time to the U.S., under the Trump presidency.
Maybe a simpler answer for today's market gains lies in the fact that we are entering a new stage of the market's emotional cycle. We call it the optimistic stage, where prices rise as new capital is put to work by current market players, as well as by new market participants, who have been on the sidelines.
It is difficult to predict the length of this phase (if it has truly begun) because it is dependent upon the success of that invested capital, as well as the time required to generate a positive rate of return for this risk capital.
One highly-respected, gray-haired sage of stock markets I respect is Jeremy Grantham, founder and chief Investment officer of Boston-based Grantham Mayo Van Otterloo. In his company's latest investment letter, Grantham believes we are currently showing signs of entering the blow-off or melt-up phase of this bull market.
"I recognize on one hand that this is one of the highest-priced markets in U.S. history, he writes. "On the other hand, as a historian of the great equity bubbles, I also recognize that we are currently showing signs of entering the blow-off or melt-up phase of this very long bull market."
He adds that the end of this phase could take anywhere from another six months to two years to complete before all is said and done. Before we do, we should expect the final emotional stage of the market to unfold. That is when euphoria takes over and stock prices reach their zenith. Parabolic price gains become the norm and a false feeling of well-being occupies the investor psyche. But don't worry, I see no signs of this occurring as of yet. So enjoy your gains and expect more in the future.
@theMarket: The Market That Keeps on Giving
You can't say enough about a stock market that continues to climb, day after day, month after month. Best of all, it looks like it will continue to do so through the end of the year. What happens in 2018? Well, that may be a different story.
There is no evidence, however, that things will have to change in the New Year. Thanks to the big fat tax refund check that Corporate America will receive next year, investors will be expecting several quarters of better earnings. At the very least, that should support stock prices for a few months, if not more.
Let's not get into whether the tax cuts are good or bad for the economy. If you have been reading my columns, you know my opinion on that. Instead, let's just focus on the stock market and how things might change within the markets. For example, technology shares, especially the FANG names, have been leading the market all year. So have semiconductor stocks, a major ingredient in so many technology products, as well as large cap growth stocks.
Recently, small cap stocks have started to outperform. This is largely due to the tax reform legislation. The thinking behind these gains is that small businesses who are mostly focused on domestic markets will gain the most from the tax cuts. As such, the sector has seen some outsized gains in the last few months.
The question I am asking is will the leadership change in the new year?
I have noticed that since the beginning of December some lagging sectors are beginning to join the party. Energy stocks are getting some buying interest, as are basic material companies. Even precious metals are participating in the market's move higher. Why then should that be the case?
One explanation could be that "a rising tide lifts all boats," meaning even the laggards get to participate, whether they deserve to or not. Another explanation may have to do with President Trump's recent comments that 2018 might be the time to refocus America's attention on infrastructure spending. All sorts of basic material companies, producing everything from steel to cement, would benefit.
While energy might not be directly impacted by infrastructure spending, it helps support prices, as does the recent production cuts engineered by OPEC. Those factors, combined with continuing global economic growth, have convinced the majority of oil analysis that the worst is behind us in oil price declines. Many are looking for oil to rise into the sixty dollar-plus range next year. At that price, most energy companies will do okay earnings-wise and the stocks are cheap.
Then there is also a growing camp of worry-warts, who fear that the $1.5 trillion in tax cuts, combined with additional infrastructure spending, layered on top of an already-growing global economy may spell rising inflation in the near future. Commodities usually do quite well in an inflationary environment and since these sectors are already selling at a steep discount to the rest of the market, why not take a bet on these groups.
But all of these topics are for next year's columns. It is enough to know that we have all done quite well in the markets this year. The fact that I have urged you to stay invested throughout all of it makes me feel grateful and happy. I am going to carry that feeling with me throughout this holiday season. Happy Chanukah and Merry Christmas to all of you and give your loved ones a hug for me.
@theMarket: Here Comes Santa
With less than two weeks until Santa Claus shimmies down your chimney, investors are betting that what the Big Man has in his sack is lots and lots of gains to finish out 2017.
Now some might say that the signing of a massive tax cut is all the present investors need. After all, despite the rhetoric, we all know that the Republican tax cut is solely directed toward the wealthy, big business, and the stock market. As such, the indexes should continue to levitate between now and the New Year.
Investors are stocking up on the shares of those companies that will benefit most from the windfall profits they will receive as part of the reduction in the corporate tax rate from 35 percent to around 21 percent. Many of these Fortune 500 companies, such as Cisco Systems, Pfizer Inc. and Coca-Cola, have already said they will turn over their tax cut gains to shareholders.
Jamie Dimon, JP Morgan Chase Chairman and CEO, says companies will buy other companies, raise their dividends and buy back stock. Some may even raise wages, he added, as an afterthought. These stated plans fly in the face of claims by President Trump and Republican lawmakers. They have promised that corporations will invest this money in plant and equipment, use the funds to raise wages, and hire new workers-- none of those statements appear to be true.
The very politicians who decry "fake news" have been working overtime to spread their own brand of this dubious commodity.
Since my focus has always been on the economy and financial markets, I see some troubling ramifications of this tax cut for the future. As readers know, the U.S. economy as well as the global economy, has been picking up steam. Our economy should finish the year with a gain of between 2.3-2.5 percent. The global economy will do better (3.4 percent or so). Next year should see our economy nudge up to 2.9 percent while worldwide growth should hit 3.7 percent. This is before the effect of any tax cut.
Now, the political rhetoric maintains that we should see our economy explode next year, based on all this corporate tax cut money. Yet, few economists outside of those paid by the GOP to come up with rosy forecasts, see much evidence that the tax cut will have any impact on growth next year. But let's say the Republicans and their president are correct; what happens
There is a high probability that the Federal Reserve Bank, which would then be headed by Trump appointees (who are decidedly more hawkish than the Yellen crowd), would be forced to hike interest rates sharply in order to stave off any inflation threat. This is an especially clear and present danger, if all this supposed new growth creates job openings in an economy that is already at an historic low rate of unemployment.
As it is, corporations still cannot fill many of the job vacancies they have because they can't find enough skilled labor. Even if the Fortune 500 embarked on a massive job training drive, it will be several years before the first graduates could fill the existing job openings. In the meantime, a bidding war could ensue, sparking unbridled wage growth. The Fed wouldn't like that either.
These would be luxury problems as far as the economy is concerned. The stock market, on the other hand, might see it differently. The good news, however, is that these potential scenarios will not appear until at least the second half of next year, if they do at all. In the meantime, I expect we will see future gains into the first half of 2018.
@theMarket: Should Be Good Month for Stocks
The House passed a stop-gap spending bill averting a government shut-down late Thursday night. As a result, markets moved higher. We can expect more of the same until the next deadline, which is just before Christmas.
To be honest, investors have become so used to these eleventh hour deals out of Congress that the markets hardly budge when the drama begins. Dec. 22 is the new date investors will be watching. We will see whether a compromise can be reached on the budget for 2018 by then.
In the meantime, the markets will remain focused on the Republican tax deal. The hope is that a compromise between the House and Senate will be reached in time for President Trump to sign it into law by Christmas. The stop-gap move by the House now frees the decks for legislators to focus on tax reform between now and then.
Next week, the Fed meets again. Investors are expecting another Fed Funds rate hike by the end of the FOMC meeting next Wednesday. That will make three this year. There should be no surprises there, since traders have been expecting such a rate hike for weeks now. The only risk may be if Janet Yellen, the Fed chairwoman, says something unexpected during her remarks after the announcement.
In the meantime, the markets are seeing quite a bit of rotational activity. While the indexes may appear to be simply consolidating across time, individual stocks and sectors are undergoing some gut-wrenching moves. This week energy, financials, technology and utilities, among others, have seen their values gyrate based on what investors perceive as under or overvalued.
At the same time, overseas markets have been correcting as well. Emerging markets and Europe, over all, have seen 2-3 percent declines recently as investors are taking some profits in those areas. Stock markets there have done exceptionally well this year. The truth is that foreign markets have been outperforming the U.S. markets ever since the elections.
Some pundits are worried by the price action. Since foreign markets have led the U.S. stock market up in price action this year, their present declines may be a forerunner of future declines here at home. If so, I do not believe we will see any fall out until January at the earliest. There are just too many seasonable and fundamental factors that will keep U.S. markets propped up or gaining for the rest of the year.
Tax reform itself has contributed mightily to the lack of tax loss selling this season. This has provided a great deal of support to the averages and will continue to do so until the end of 2017. And then there is the Santa Claus Rally that will soon be upon us.
Combined with a good economy, low interest rates, and low unemployment, this gives most investors few reasons to sell.
As a result, the stock market should close out the year at these levels or higher. Next year may not be as positive, but we will worry about that when the time comes. In the meantime, count your shekels.
@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.