We are optimistic about the long-term prospects of the U.S. economy. The new tax law will add $1.5 Trillion of stimulus. The upcoming Infrastructure bill will probably be passed in 2018 which will add upwards of $1 Trillion in stimulus. The economy should accelerate as a result of the stimulus. An accelerating economy adds to corporate profits and thus to stock prices over the next 5 to 10 years. All this stimulus is not good for bond investors because interest rates will probably rise during the upcoming 5 to 10 years. Higher interest rates means bonds that you already own will go down in value – and long-term maturity bond prices decline the most. We have already taken steps in portfolios to reduce maturities to attempt to protect portfolios against the risks of higher interest rates.
In the short-term, the stock market could experience a wave of selling in early 2018. Some stock investors have delayed taking profits until 2018 to take advantage of the new tax law rules. It is difficult to predict the length or severity of the selling pressure or even if it is noticeable. But, in the event the stock market drops, we would view this as a buying opportunity (keeping in mind our long-term favorable view).
Section 529 qualified tuition plans are modified BY THE NEW TAX LAW to allow the plans to distribute no more than $10,000 in tuition expenses incurred during the tax year for designated beneficiaries enrolled at a public, private, or religious elementary or secondary school.
The U.S. stock market has jumped since the November 8th election. We identified 4 initiatives on which the U.S. stock market is speculating to be successfully accomplished early in the Trump administration. What will happen next? It is still to be determined!
The 4 initiatives will have a tremendous influence on the “Heat Map” which forms the basis of our forward looking view of the U.S. economy. We consider the success or failure of the 4 initiatives to be “leading” indicators for the Heat Map.
Below are the 4 Trump administration initiatives upon which the stock market is speculating and what progress, if any, has been made:
Tax cuts and tax reforms benefiting most individuals and businesses. THE MOST SIGNIFICANT TAX LEGISLATION IN A GENERATION WAS SIGNED INTO LAW LAST WEEK. CUMULATIVE PROGRESS TOWARD GOAL: 100%
Infrastructure spending of up to $1 Trillion over the upcoming 7 to 10 years. PROGRESS MADE ON TAX REFORM POINTS TOWARD PROGRESS IN THIS AREA, TOO. CUMULATIVE PROGRESS TOWARD GOAL: 35%
Affordable Care Act amendment, reform or reorganization. THE TAX REFORM LAW REMOVED THE REQUIREMENT EACH INDIVIDUAL OBTAIN HEALTHCARE COVERAGE. PROGRESS TOWARD THIS GOAL IS 35%.
Roll back of government regulations and Executive Orders considered to be difficult for businesses. ROLL BACKS HAVE CONTINUED. CUMULATIVE PROGRESS TOWARD GOAL: 55%
As the action happens in Washington on these 4 initiatives, don’t be surprised if the political “tug and pull” contest results in a wilder than normal stock and bond market.
We will continue to report in future issues on the progress on each initiative.
Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: This grade is a A- (favorable).
THE FED AND ITS POLICIES: This factor is rated C- (Below average).
BUSINESS PROFITABILITY: This factor’s grade is A- (very favorable).
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 5. These risks deserve our ongoing attention.
Last week, U.S. Stocks increased. Foreign Stocks and Bonds were unchanged. During the last 12 months, STOCKS outperformed BONDS.
Returns through 12-2-2017
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
-.6
3.0
3.7
2.1
2.0
4.1
US Stocks-Standard & Poor’s 500
.3
22.2
21.0
11.1
15.8
8.4
Foreign Stocks- MS EAFE Developed Countries
-.2
23.9
24.7
7.2
7.7
2.0
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®. This week Laurie is on vacation and a pre-recorded show will be aired.
No calls will be taken this week. This show will be broadcast at the regular time. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area– or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org.
It wasn’t as if there was no news to get the market moving. We learned last Friday that new-home sales had surged in November, and that consumers are spending more and saving less. Congress passed its tax bill, which was then signed into law by President Donald Trump, and it also agreed on a stop-gap budget measure to keep the government funded through the middle of January.
Who could ask for anything more? The market, it seems. The Dow Jones Industrial Average gained 102.32 points, or 0.4%, to 24,754.06 last week, while the Standard & Poor’s 500 index advanced 0.3%, to 2683.34, and the Nasdaq Composite rose 0.3%, to 6959.96. It was something of a yawn, and trading even reflected it: Friday’s volume was the lowest for a full day this year.
Most of the easy money has already been made in the tax trade. When it became clear in mid-November that getting tax cuts passed by Christmas had become a real possibility, the S&P 500 rallied 4.6%. Stocks set to get a big earnings boost outperformed the overall market. “Much—but not all—of the tax-related benefits to earnings are likely reflected in stock prices already,” explains Credit Suisse strategist Jonathan Golub. He isn’t worried, however, because he believes earnings growth and higher valuations can push the S&P 500 up to his year-end target of 3,000.
Maybe so. But there’s no denying that everything is about to get a lot more complicated—including those earnings. Until last week, analysts had been reluctant to change their estimates to account for tax cuts because they didn’t know what a final bill would look like. Now they do, so they are tweaking their numbers, even if much of what we know at this point is still guesswork.
That could make for more turbulence during the first part of the year, as investors wait to see what the real impact of tax reform is, says JJ Kinahan, chief market strategist at TD Ameritrade. “I don’t know if the market will react as positively to the first couple quarters of earnings because people will be adjusting to what they mean,” he says.
And that’s not the only adjustment we’ll have to make. We’ve been on the lookout for signs of excess—a boom in mergers and acquisitions, a spike in capital spending—as a possible indicator that the market was peaking. But it’s the excesses that are fading away that could create the real problems in 2018, says Leuthold Group Chief Investment Officer Doug Ramsey.
One is the economy’s excess capacity, which, Ramsey notes, has closed, according to Congressional Budget Office estimates. That means there’s less potential for economic growth. The Federal Reserve’s quantitative-easing program also created excess liquidity in the market, with all the extra cash likely going into financial assets. But liquidity—as measured by growth in the money supply minus growth in industrial production—has also started to dry up recently, according to Ramsey. “The landscape is changing under our feet,” he says.
None of this points to an imminent end to the bull market. But it suggests that next year may be no holiday.
