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...

Investors underwhelmed by tax reform

With great fanfare, House Republicans rolled out a tax reform proposal that they promised would get this country going again and invigorate business, while creating jobs and huge savings for the middle class. What are they smoking? Clearly, the entire reform package was simply a smoke screen to reduce taxes for American corporations with the majority of benefits directed at the country’s largest companies. For the individual, depending on what you make and where you live, taxes will remain the same or go up. Several legislators used a postcard as a prop claiming your individual tax return will be so simple it will fit on a postcard. The reason is simple. This plan will greatly reduce the few tax deductions we have left. State and local taxes will no longer be deductible, property taxes will be capped and a slew of other credits and deductions have been reduced or eliminated. In my opinion what we have here is a classic distribution of wealth from the individual to the corporation. You may have noticed that while the GOP cut taxes on corporations permanently (from 35% to 20%); they did nothing to reduce or eliminate the mountains of tax credits, incentives and loopholes available to big business.  If the truth be told, the effective tax rate of U.S. corporations, after taking advantage of these loopholes, is 12.6%.  And that was before this proposed tax cut. It doesn’t take rocket science to figure out that if the Republican proposal passes, U.S. corporations could be effectively paying no taxes at all. The government may actually be paying them thanks to the various tax...

Markets are waiting for tax reform

Stocks gyrated up and down this week as events in Washington competed with quarterly earnings results for investor’s attention. Next week, we should find out more about both. True to form, third quarter earnings results have been in-line or better than expected. Over 70% of companies have “beat” earnings estimates, which is no surprise. Sales and earnings guidance have also been upbeat. For those unfortunate corporations who “missed” their targets on either the top or bottom line, retribution was swift and dramatic. Some companies saw their stock price plummet 20% or more. And we are not just talking about penny stocks. Some mega-cap biotech names, for example, were taken to the woodshed and are still falling in price days later. On the other hand, some technology stocks, including the big momentum names such as the so-called “FANG” stocks saw their shares skyrocket on Friday as results more than beat analyst’s estimates. In the background, legislators in our nation’s capital continued to march forward in their plans to cut and reform taxes. The House passed the Senate’s version of the budget this week. That was a preliminary but necessary move that now allows tax reform to move forward through Congress with a simple majority vote. No Democrats voted for the budget and some Republicans also abstained. The budget still passed, but by a slim majority. The political maneuvering behind the vote gave many investors the impression that next week’s tax plan would not be as simple to pass as some might expect. However, traders are still giving Congress the benefit of the doubt, at least until next Wednesday when the...

Markets look ahead

As earnings season gets underway, the upside surprises continue to overwhelm the disappointments. As long as that trend continues, the markets are in good shape. The Dow hit a new record of 23,000 this week but so did the S&P 500 Index and a slew of other averages both here and abroad. As equities grind higher, bad news continues to be ignored. Investors, as they should, are keeping their attention focused on the future growth of the economy. Wait a minute, you may say, what about all the natural disasters that have beset our nation over the past few months? Won’t those devastating events put a big dent in our GDP? Just look at the housing starts data for September. It was a disaster as the impact of floods and hurricanes caused widespread labor and material shortages. It is true that 2017 will likely rank among the most costly years for natural disasters that the world has ever seen. And it hasn’t just been here in America. A succession of hurricanes has created havoc with several foreign countries. And don’t forget the earthquake that hit Mexico last month, nor the enormous landslides that have devastated parts of Latin America and Asia. The misery and loss in terms of lives, dislocations and suffering that these natural disasters have visited on humanity has not been lost on any of us, not to mention the destruction of wealth involved. But there is a silver lining in economic terms, thanks to the way Gross Domestic Product (GDP) is measured. Gross Domestic Product measures the total dollar value of all goods and services produced...

In the middle of a melt-up

Greed is rising. Fear is falling and all is well within the world of equities. What does that tell you? It tells me that complacency is the order of the day among investors. And that fear of missing out (FOMO) is gathering steam as every minor daily dip is met with buying. Earnings season has started, led off by the multicenter banks. You remember them, the banks that were “too big to fail.” So far, the bottom line earnings per share numbers are coming in ahead of forecasts. Their top line growth, however, in some cases, appears to be disappointing investors. Evidently, when financial markets move in one direction, these financial behemoths can’t make a lot of trading profits. As far as what used to be their bread-and-butter business of loaning money, that largely depends on interest rates. Although rates have been rising on the short end, thanks to the Fed, the overall spread between what banks charge for loans and their cost of money is still anemic. Financials, overall, are important to the stock market because historically, equities have a hard time rallying without bank participation. So far this year, financials are up but still lag the gains of the overall markets. And while our president is continuing to do whatever it takes to destroy the Affordable Care Act, the healthcare sector seems to be taking it in stride. Of course, hospital stocks are getting decimated, since investors realize that the nation’s hospitals will most likely be the victims of the President’s newest executive action. The White House’s latest move would halt all Federal payments to insurance companies...

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%, 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% of GDP, is key to the future health of the economy. Good news—wages jumped sharply higher last month, rising 0.5% over the August numbers and 2.9% 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...