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Market Commentary

NOVEMBER 2017

 

Tax reform or not tax reform, that is the question. With apologies to Bill Shakespeare for dragging Hamlet into a financial newsletter, this seems to be the question of the day. The U.S. currently has the highest corporate tax rate among developed nations by a large margin. Part of what we have been witnessing in the stock market lately has been the result of investors anticipating good news on this front. The Republicans have come out with a proposal to simplify the tax code and most meaningfully, to lower the corporate rate. This would certainly be a boost to the bottom line of U.S. corporations and would likely lead to higher investment rates and additional hiring. However, we remain perplexed at the level of certainty that is seemingly being placed on the success of this effort. Given what we saw in the Obamacare efforts and the current state of Congress, we find it unlikely that any true reform is going to be achieved. We do expect some changes to the tax code, but a complete overhaul is highly optimistic. Let’s hope we are wrong, but if we are not, the market will probably have some re-pricing to do.

 

For the month, economic news was quite upbeat. Retail sales rose 1.6% as expected. Given last month’s poor hurricane numbers, this is a good number. Payrolls rose 261,000, which was less than expected, but again, a good number. The winning number was 3Q17 Gross Domestic Product (GDP), coming in at or above 3.0% for the second time in a row. It seems clear that U.S. GDP is currently on an uptrend. These numbers continue to support the thesis that we have no recession in sight. Finally, we are well into earnings season and the results have been excellent. Most of the companies continue to beat expectations on both earnings and revenues. So, for the time being, the economy and earnings that we invest in are all in an upswing.

 

The macroeconomic news is still good, even though valuation on the market continues to be extended. In general, we believe there are two themes to keep our eyes on here. First, the tax-reform proposal we mentioned earlier. If progress should seem to stall, it may lead to significant re-pricing of the markets. Second, and perhaps more dangerous, is the appointment this week of Jerome Powell as the new head of the Federal Reserve. If anything kills bull markets, it is inflation and the Fed’s response to inflation. Janet Yellen has been a known commodity and the market is calm. If a sense develops that Mr. Powell might be more hawkish (wanting to raise rates faster) than the dovish Yellen, look out.

 

Always one of our favorite charts is the monthly look at the S&P 500 Index going back 25 years. We can clearly see the 1990s bull market, the housing boom, and finally our current central bank money pumping rally. We highlight this so investors know where we stand. Keep this in mind when someone tells you that the bull market is just getting started. We may have some time to go yet and could see another year or two of gains, but let’s not think that things are just getting started. As we have said many times before, don’t run until you see a catalyst for the market to struggle. Until then just sit back and enjoy the melt-up.

 

 

 

 

 
 

 

 

 


Disclaimer: Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of securities. Investments involve risk and are not guaranteed.