“Market 2017 – DOW 21K?”
Ty J. Young Editorial
There has been a full religious conversion among many “bears” into “bulls”! Some of the wizards found on Wall Street are now saying the market may not go down after all…many are even proclaiming “Dow 21K here we come”!
Certainly there are good arguments to support a continued upward movement in stocks. As we have seen, there has been a continued “Trump Bump” effect in stocks, and the highest rating in the Consumer Confidence Index since 2001 (pre-9/11). Certain sectors should surge – think defense stocks and energy companies. Predictions of the “Grim Reaper” appearing with your 401K statement could be way off base but could the bulls have been right all along?
I. 3 Reasons the Market Will Continue Its Upward Momentum:
1. Tax reform ensures robust economic growth: We have said it many times – Kennedy cut taxes: the economy grew, tax revenue increased; Reagan cut taxes: the economy grew, tax revenue increased; Bush cut taxes: the economy grew, tax revenue increased. There has never been a modern example of cutting taxes and the economy not growing and growing significantly. Tax reform from both the Republican Congress and the Trump White House includes significant cuts across the board and a flattening of tax rates. Business expansion, robust GDP growth – ALL and more will follow. Added to which – Trump’s campaign promise regarding repatriated corporate cash. Trump promised an advantageous tax treatment for companies to bring back cash held abroad, and this will almost certainly provide more stimulus into the economy as well.
2. Regulatory reform means business expansion: By definition, less regulatory intervention means more money for business to keep. Less regulation means more time to conduct business, rather than hours of compliance paperwork (from personal business experience). More money for business, and more time to make money for your business, means a stronger bottom line for the shareholders. Subsequently, the value of stocks go up. Trump and Congress both have promised rolling back the Leviathan, the state intervention into the marketplace that has been the noose around the neck of the U.S. economy. Loosening the shackles means businesses will grow and stocks will flourish.
3. Fundamentals will meet the market: The current P/E (Price-Earnings) ratio of the stock market is 26. The historic average P/E ratio of the stock market is about 14, suggesting the market is overvalued by approximately 86%! Many economists believe the stock market will come down to historic P/E ratios. They are predicting a correction of roughly 40% in the market. But now, with Trump’s election, maybe the game has changed. Perhaps, because of the better regulatory environment, tax environment, and environment for companies to grow, many economists now believe the environment has fundamentally changed. Corporate earnings will increase dramatically…lowering the P/E ratio through growth of earnings instead of a correction in the stock price. Any way you slice it that is a huge shot in the arm for the economy and for the overall markets.
II. 3 Reasons the Bears Could Still Be Right:
1. The policies which helped keep the market afloat may be reversed: Nothing in the fundamentals, as we understand their historical importance, has supported this 7 year-long market upswing. It has been primarily supported by policies such as price appreciation due to the printing of money, and artificial stimulants such as trading the Fed and zero interest rates. Some additional data has now supported stock market appreciation – for example, by comparison, the American economy is much stronger than any other global player. Not that we are strong, but simply stronger by comparison. But for 2017, those policies may be reversed, and other actions may also help change the fortunes of the market. Many investors have the intention of cashing in on their stocks given the more favorable tax treatment they expect this year…Trade wars may harm the U.S. economy more than it helps…The Fed may no longer print money and has begun to raise interest rates…these policy corrections and more in a normal environment could dampen the gains found in the stock market.
2. Regulatory reform is stymied by the bureaucracy: Harry Truman had a famous line in describing the election of General Dwight D. Eisenhower to the Presidency – “He’ll sit here, and he’ll say, ‘Do this! Do that!’ and nothing will happen. Poor Ike – it won’t be a bit like the Army. He’ll find it very frustrating.” Truman was referring to the fact that as a General in the military, Eisenhower was used to his plans and instructions being carried out immediately, but that in government, he would be lucky if they were carried out at all. With most of the bureaucracy ideologically opposed to Trump, it is possible that the “bureaucrats” attempt to thwart his efforts at reform.
3. We are simply overdue for a correction: The stock market gurus claiming they would never invest in a principal protection product seem to forget the crash of 2008, 9/11, the dot-com bubble…you don’t put some of your money into a protected investment vehicle AFTER the market corrects, you do it BEFORE. Confirmation of such a plan is obvious, but can be found in this CNBC Roundtable discussion from 2009 – https://www.youtube.com/watch?v=iOyXfcB9r6s. Seven year market upswing, new highs everyday, almost 200% gain from the low…this is calling for a prudent and careful consideration of putting some of the gains into a protected principal vehicle. We are simply overdue for a correction.
Dow 21K is a possibility because the public sentiment has soared in the wake of the Trump election. Consumer confidence is at a 15 year high. Some of the artificial stimuli is being rolled back, as interest rates go up and new reform legislation seems to be pending. All the more reason to take some of those gains, and get them protected from any possible correction.
If you would like to learn how you can have your money protected against market losses, give us a call at 877-912-1919.