As an Independent, I'm looking at the big reasons why this stock market has accelerated rapidly since Trump was elected: 1) The promise of much lower corporate tax rates; 2) Continuation of a low-interest environment; 3) Companies lean and mean, continuing to grind out increased profits, Q over Q; Following the plight of the current Administration and Congress, and its inability to legislate anything major thus far, I fail to see how a tax reform package will get passed, let alone defined. Every day its alleged content seems to change, whether it's elimination of 401K tax deferral, elimination of the mortgage deduction, increased child care tax credits, elimination of personal exemptions, state tax and local property tax deductions, etc. Additionally, the more we learn, the more we realize that this purported tax reform plan will disproportionately help the upper class and corporations, at the expense of the middle class, particularly in high cost states. My point here is that I fail to see how the deficit hawks will support any sort of plan that isn't revenue neutral, and any plan to remove the aforementioned deductions will be blasted by all the middle-class advocates, particularly those in high-cost states. If tax reform goes down in flames, which I think it will, and interest rates continue to be raised (talk of December being next), isn't this the perfect storm to a massive correction in the markets? Thoughts? Comments?
Remember Bill Clinton's presidency when you consider a paralyzed administration and preoccupied congress (hint: this coincides with the pivot towards the tech bubble). November last year looks very much like previous pivots into bubbles. There's no government like no government. I would also take the longer view of this market--that 2000 and 2008 cleaned out the tech failures and what was left has consolidated in the void left. This is not dissimilar to the consolidation of railroads, and proliferation of refrigeration (and A/C), electric light, radio, and wire communications. That is to say, this is only the second time in 120 years that the way we communicate, commute, shop, and entertain ourselves has changed over the course of a single generation. There's no reason to think this bull couldn't run similarly to it's predecessor which was roughly 1905-1929. Point being, this could be the beginning and not the end. But I'll also keep in mind how the bull party ended in 1929.
History has shown that credit Cycles occur mainly as a function of the control of the money supply...Austrian have illuminated it the best.. the idea that you can time the cracking of the bubble as it relates proves to be very very hard.. sure we can say it's coming but to say when or how the exit door will be looked for is tough.. I don't think the fed will agreesive back off their "control". Their control is only to print therefore they can only print as a resolution to any problem.. taxation is theft for the rich and for the middle class. That being said the rich is not a static class of people historical and as well the poor is not static. To even state a class conflict in relation to taxation is to frame the entire argument in a way that detracts from the real issue and that is the tax liability and it's associated costs to the standard of living has rose consistently . Who cares whose money is grabbed coercively ? When is it theft when they take 100%? The real issue is now that the state apparatus has grown to such a degree people are no longer looking to innovate and serve the consumers demands they are looking to arm themselves with the state apparatus to have exclusive rights enabling them out of the free market ... The correction if allowed is the healthy market mechanism to liquidate bad behavior and set prudent behavior .. that being said. Euphoric right wing Interventionism in the market i believe will float the market for a while longer.. people really do believe this is a sound market built on earnings and stable economic growth.. koolaid at the cult party for real
OP, generally agree with the premises you laid out. HOWEVER - history shows that after the market has made an all-time high it is usually higher 3,6,12 months forward. With that said, we are currently in a unique period in time because the market is trading in roughly the 98th percentile in terms of expensiveness relative to earnings, sales, fcf etc, so how much air is above this thing I'm not sure (unless we want to repeat the insanity of the 2000 tech bubble). One point I do take a bit of issue with is where you said: While this is true over the last 12 months, in general, earnings over the US stock indices has been overwhelmingly underwhelming for the last 5 or so years. For example, in 2011, the $DJIA components in total were earning $225 in revenue for every 1 DJI index point....today, 1 DJI point equates to $135. So basically nearly all of the gains have come from multiple expansion, FANG-momo chasing on a 5-year basis, while I agree the 1-year picture looks a bit rosier. Agree with you about tax-cuts. If a headline hits the wire that tax cuts are off the table, I'd expect the S&P to hit an immediate airpocket and drop 10%. Perhaps within a week.
SteveM, thanks for your counterpoint on point # 3; make sense. After I posted this, there was a NEW HEADLINE that hit the wire; Jeff Flake saying that he won't run for re-election, and providing a rather scathing portrayal of Trump's behavior (which I agree with, btw). Given Corker's and Flake's outspoken remarks about Trump today, one has to wonder if the Tax Reform plan will now be in jeopardy, in terms of support and votes. Of course, the market didn't even flinch when this news came out today.
Was this at noon? If so, the market shaved 5pts right away. I think we're going to see markets finally slow down. Tax reform is already baked in so when it doesn't pass, we'll get that decent 300-500+pt correction we're all waiting for.
I wouldn't be surprised if it's a lot more than 300-500 points though. Unwinding regulation will artificially prop up the market for a little bit... It's like the movie "Inside Job". Next one is going to hurt guys..