@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?

 

Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 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.