Is this a blow-off top?

Stocks roared higher this week. The gains were fueled by the expectation that Congress will pass a tax reform bill before the end of the year. That is not at all certain, but the markets are assuming it’s a done deal. So what happens next? “Don’t you think we should take some profits?” asked a college professor and one of my smartest clients. “Not yet,” I counseled her, “unless you plan to jump back in next week.” I fielded four more phone calls like that on Thursday as the Dow melted by 300-plus points. All of those callers used the words “crazy” or “insane” when describing the recent market action of stocks. They are not wrong, but that’s exactly the kind of behavior market participants exhibit when we are in a melt-up in the markets. Readers will recall that over the last few weeks I have been preparing you for just such market behavior. Sit back and enjoy it. If you detect certain calmness in my words, it is because I am not worried about a blow-off top, if this is truly what we are experiencing. A top is always followed by a decline or at least a period of sideways action until things calm down and investors come back to their senses. No one likes to see their profits disappear overnight in a down market. Fear and flight are two important concepts of human behavior that readers should understand. Human behavior is such that when one faces (fears) a loss, the first impulse is to flee (sell). It is an impulse that is antithetical to becoming a successful...

The Bots are coming

One no longer needs to imagine a post-apocalyptic world where humans are hunted into extinction by intelligent robots. While a shooting war may not break out between the two sides before 2030, a new study by the McKinsey Global Institute indicates that as many as 375 million human workers will be replaced by automation. Most readers are already aware that companies using high degrees of automation, such as Amazon, are decimating the brick and mortar method of selling products. Most analysts believe it is inevitable that this trend will extend to all kinds of products. Pharmaceuticals and food are just the most recent items to be transitioned over to the internet. While this will add convenience, lower prices, and speedy delivery to consumers, it comes at a cost. That cost is in the loss of jobs. This new study by the McKinsey Global Institute predicts that this trend will continue. Jobs most at risk will be those that require physical activity. Everything from lathes to tractors will become automated, putting most machinery operators out of work. But it doesn’t stop there. Fast food services of all kinds will no longer need human help. Bank tellers, data collection and all types of processing services will also succumb to automation. Humans involved in back-office processing throughout myriads of industries will no longer be needed. Nor will many financial occupations from mortgage origination, paralegals to maybe even elements of money management. Many of those developments are already happening, but the pace of change will accelerate. One can only imagine the consequences worldwide if workers simply do nothing but await their fate. What...

Sweet spot for the markets

Thanksgiving weekend usually marks the beginning of a great seasonal run in the equity markets that continues through January of next year. There are some additional reasons why this year may prove to be a good one. No one disputes the fact that we have had an unusual year for equities; all three U.S. indexes have gains in excess of 15%. That is more than twice the average gains of the S&P 500 Index on a historical basis. In addition, those spectacular gains have been accomplished without any declines of more than 3% all year. If that is not a record, it is pretty close to one. The economy, unemployment and inflation have all been moving in the right direction. In addition, the nation’s leading economic indicators are all pointing to further macro gains in the future. Earnings have been stellar for most of the year, while interest rates have remained at historically low levels. That makes investment alternatives to equities few and far between. Investors are also waiting for an outcome to tax reform. The latest bets are that some kind of tax reform/cut will be on the president’s desk before Christmas. At least that is what President Trump is tweeting. It is one of the main reasons why we have not seen anything more than a mild sell-off in stocks. Usually, investors would be busy combing through their portfolios after such a year of gains. The markets are up almost 25% since the election and normally professional investors would be locking in long-term capital gains. They would also be selling losers, harvesting tax losses and rebalancing portfolios...

Why stocks continue to climb

As we approach the end of the year, most investors are both dumb-founded and pleased at the stock market’s performance. President Trump and his followers would like us to believe it is all because of them. Hog wash. There has been no substantive legislation since the new administration took office. Promises can only take us so far. Some say any further upside will be short-lived, because living on hope alone has already taken us too far. And yet, somehow the economy is still growing, even gathering momentum. Recall too, that Donald Trump and the Republican Party gained power on the promise of undoing many of the trade agreements the U.S. has forged over the past forty years. This was perceived by foreigner leaders (and their people) as a huge negative for the world economy. Despite the president’s posturing and his actions to pull the U.S. out of the TPP and now NAFTA, nations like India, China, Japan, most European nations, as well as many emerging markets, have experienced stock market gains that have left the U.S. averages in the dust. This happened despite the President and his tweets. So, if it isn’t Trump, why are stock markets going higher? The truth is that forty-five of the largest economies in the world are experiencing growth at the same time. This has not happened for over a decade. As that growth continues, global equities gather more steam. However, as time goes by, some will do better than others. But before you give credit, make sure you know where and who to give credit to. Don’t look to the world’s elected leaders...

Buying the dips still works

After several days of mild selling, buyers appeared, as they have all year. The ‘buy the dip” mentality is still alive and well. It is why you should stay invested. At least that’s the advice I’m getting here at the Schwab Impact conference in Chicago. There is nary a bear to be found among the several thousand investment advisors attending investment seminars for three days. Liz Anne Sonders, Schwab’s Chief Investment strategist, believes we are at the latter stage of the economic cycle, but that expansion is still not at its peak. Capital spending on fixed investment and productivity appears to be growing. While investment sentiment is extremely positive (a bearish, contrarian indicator), as measured by Ned Davis Research, it is only one variable in determining where the markets are going. Right now, valuation metrics are all over the place: from stocks are very expensive, to fairly valued, to cheap, when compared to interest rates. Her sentiments were echoed by Jeff Kleintop, Schwab’s global strategist. He believes foreign investments will continue to outperform U.S. equities as they have all year. Emerging markets, he believes, will do even better than developed overseas markets. He points to the fact that every one of the world’s 45 largest economies is growing this year, something that has not happened in a decade or more. Diversification, (as opposed to putting all your eggs into a U.S. basket) is finally working after years of foreign markets languishing in the shadows of an American recovery. Correlation between markets, says Kleintop, is at its lowest in 20 years. One variable they both look at (as do most...