@theMarket: Markets Have Best Week in Five Years

Stocks have had what is called a "V" shaped recovery this week. The indexes climbed every day at least one percent or more. Will it continue or ...

 

It wouldn't surprise me if stocks took a breather about now. A bout of profit-taking after the stupendous come-back we have had would be entirely reasonable. If the S&P 500 Index, for example, fell back 2-3 percent over the next week or so that would be healthy.

 

Remember, we are still in that period of the markets where investors are driven by the fear of missing out. As interest rates continue to climb and bond investors experience losses, the natural thing would be to sell bonds and buy equities. 

 

In a lesson in reverse psychology, investors over the past week have talked themselves into believing that higher rates and a pick-up in inflation is actually good for the markets. Last week that same set of variables spelt doom for the stock market.

 

For me, the pullback was part of the natural rhythm of the equities market. Expect more of the same as the year goes by. However, these market dips will be supported by the accelerating growth of the global economy. That growth should climb this year to about 3.7 percent, while the U.S. economy should grow by almost 3 percent. We will also see inflation begin to climb to a 2.5 percent rate (give or take), which is higher than we have seen for many years.

 

The market is not wrong when they say a little inflation can be good for the economy. Everything is good in moderation.  It is sudden spikes, whether in interest rates or inflation, that unsettles the market.

 

Since prior to the Republican tax cut, I have been saying that the danger would be that the tax cut really did what the president promised:  increase investment and boost employment. If, on the other hand, the $1.5 trillion was simply a mass redistribution of wealth out of the pockets of Main Street and into the coffers of corporations and the rich then the stock market has little to worry about.

 

The money will simply be used to buy back stock and increase dividends. Since 84 percent of all stocks are owned by the wealthy (including Trump and almost all senators and congressmen), not only will these beneficiaries gain on a lower tax rate, but their investments will also gain.

 

As for the economy, it will do quite nicely without the additional fiscal stimulus. Unemployment is already approaching historical lows. So, from an economic point of view, the tax cut was eight years too late and is a needless addition to an already-huge government deficit. 

 

So far the evidence points to the tax cut as a redistribution of wealth. Since the tax cut announcement, corporate buybacks have gone through the roof. Year to date, (and we are only in February) the amount totals $170.8 billion (17 percent of the tax cut) versus $75.7 billion for all of last year.

 

As for investing the tax cut into plant, equipment, and new jobs, well, 70 percent of corporations polled have no intention of investing the money, while the other 30 percent had plans to invest anyway prior to the new tax cut.

 

The final and most recent fiscal spending proposal on the nation's infrastructure announced this week is much-needed. However, the scheme, as presented, would mean the federal government would put in "seed money" of $250 billion, while the states and private sector would put in $750 billion.

 

Given that the tax cut was an enormous economic blow to states that have their own income tax, asking them to now ante up $750 billion for much-needed infrastructure repairs is the height of lunacy. Of course, Trump knows this all too well, but it gives him an out to blame the states for not doing their fair share when his proposal goes belly-up.

 

As for the markets, remain invested. Increased volatility is no excuse to sell, only a reason not to look at your portfolio every day or week.   Remember that the more red you see in your portfolio on any given day, the higher the probability that you will sell at the exact wrong moment.

 

Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.