There is a saying on Wall Street that “the trend is your friend,” and it appears to be the case right now. The market continues to climb to all-time highs as we get ready to enter earnings season.
North Korea Tensions
The worries around North Korea still exist but have been shaken off time and time again. Just recently, we had yet another threat from Kim Jong Un that “nuclear war may break out at any moment.” That fell on deaf ears as far as the market is concerned. Here’s hoping that the market continues to believe it’s nothing for us to worry about.
It appears all but certain the Fed is getting ready to raise rates in December. I think the time is right, and we should take advantage of normalizing, at a very slow pace, while we can. This would allow us to ease rates if (when) the next crisis hits. The market can certainly handle some tightening in my opinion.
Trump to Name Next Federal Reserve Chairman
Trump has also said he is very close to naming the next Federal Reserve chairman. This will probably be the single biggest factor affecting the market for the next few years. There are many schools of thought on what the Fed should do with monetary policy. Some base their view on inflation, economy, and job growth. With a wide variety of opinions and potential actions, there could be a variety of outcomes.
Trump has narrowed his choices down to five candidates. They are: current Fed Chair Janet Yellen, current Fed board member Jerome Powell, National Economic Council Director Gary Cohn, former Fed board member Kevin Warsh and Stanford University economist John Taylor.
Personally, I would love to see Yellen reappointed. The market appears to be content with her policies, rhetoric and vision. And if Trump goes too aggressive on his nomination, the market may see it as reckless and lose a little faith in the future of our economy. We will keep a very close eye on this situation.
We believe that Fed policies and interest rate management — fueled by a drive to spur market growth — are why the markets are rising to all-time highs. With no competitive alternatives in the bond market or savings/CDs, average investors are being forced into the stock market to keep pace with inflation. Our Fed chairman is probably the single most powerful person when it comes to the U.S. stock market. Who Trump selects will have a lot to say in where the stock market goes from here. So I say, if it ain’t broke, don’t fix it. Let’s keep this market happy with a Fed chair we are all familiar with: Janet Yellen.
We also believe the major catalyst that has fueled the “Trump rally” is the likelihood of tax reform. Trump is hoping to bring corporate taxes down to 15% (now the talk is 20%), which would be a short term boon for stock prices. He also claims to have a goal of lower taxes for 100% of the middle class, but the details are not clear on that. Who knows how feasible either of these goals are, but rumors indicate we are closer to getting tax reform than we have been in over 30 years. Goldman says we have a “65% chance that tax reform gets through.” If it happens, we fully expect the market to climb another leg higher.
If the deal falls through, we could just as easily see a major decline. Treasury Secretary Steven Mnuchin sums it up here: “To the extent we get the tax deal done, the stock market will go up higher. But there’s no question in my mind that if we don’t get it done you’re going to see a reversal of a significant amount of these gains.”
On Oct. 19, the Senate passed a budget, which puts tax reform within striking distance. The budget was carefully crafted to allow tax reform to pass using a process called “reconciliation” without requiring any bipartisan support. With 51 republicans in the senate and Vice President Mike Pence as the tie breaker (who we can always count on to toe the party line), the Republicans can pass the bill even if two of their own do not support it. We should mention, however, this is the same process that failed to repeal the Affordable Care Act (Obamacare).
Lastly, in order for this bull market to continue to have legs, we would like to see more of the rotation from growth to value. Typical value stocks, like financials and energy, have been breaking out to levels not seen since early this year. This bull market has been led by one group of stocks for years now, which is typically unhealthy. If we were to get some new leadership, at least temporarily, that would add some fuel for the bulls to continue the trend higher.
There are many story lines out there that could either make or break the upward trend in the market, but all in all, I believe the trend will be our friend in the near future.
As always, we will keep you up to date on all the latest developments, so stay tuned.
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Clint Kirby – Chief Financial Strategist
DreamWork Financial Group
Clint Kirby, DreamWork Financial Group, is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.