@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.

 

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.