Investors Shrug Off Risks While Stocks Continue March to New Highs

October 6, 2017

You will need to read carefully to notice many differences between the 2nd and 3rd quarter market updates. The “eerie calm” we noted last quarter persisted, with no major pullbacks and a seemingly relentless march to new highs. Just as last quarter, North Korean missile tests drew international consternation and inflammatory responses from our President. Once again, there were more surprising revelations in the Russia investigation, and multiple embarrassing failures by Republicans to pass an Obamacare repeal bill. And for the eighth consecutive quarter, the Dow Jones Industrial Index advanced, closing up 5%, as part of a streak which is now the longest since 1997. Despite this and other news, there were again just three instances where the Dow Jones index gained or lost more than 1% in a session – a remarkably low level of volatility.

 

 While the market’s reaction to news events, economic data, and corporate earnings reports seems monotonous, there is much going on below the surface that merits consideration. Some factors support a continuation of the bull market: the economic expansion has deepened and synchronized around the globe, with more than 98% of world economies participating, including Japan, the world’s third largest, which is now in its longest expansion in more than a decade; central banks continue to provide easy monetary conditions; and U.S. business investment and manufacturing activity are both improving, providing added support to consumers who had long carried the recovery by themselves. Finally, additional stimulus in the form of tax cuts may soon be forthcoming.

 

At the end of September, President Trump and the Republicans proposed a broad framework for a tax code overhaul, focusing on corporate tax cuts and reducing the number of individual tax brackets from seven to three (or four).  So far, few details have been provided that could credibly back up the President’s assertion that the wealthy won’t receive huge tax cuts, nor do we know enough to fully back the Democrats’ claims that the plan will blow a multi-trillion-dollar hole in the budget. We don’t even know if the Republicans can pass any bills, much less a contentious tax overhaul. So, the range of possible outcomes is vast. For now, the market seems to be placing better than even odds on a significant reduction in corporate taxes, so another legislative failure could be detrimental to the bull market.

 

Other elements contribute to an uncertain outlook. The President will soon announce the next Fed Chair, and he is deciding between sticking with market-friendly Janet Yellen and candidates who are inclined to raise interest rates faster than the market now expects. In Germany the re-election of Angela Merkel to an unprecedented fourth term as chancellor has cheered markets, but Europe must still steer through Brexit and other challenges, including the rise of nationalist anti-Euro parties across the continent. In Asia, a bellicose North Korea has increased pressure on Japan to put aside its post-war pacifism, and the situation threatens China and challenges the role of the U.S. as a stabilizing influence in the region.

 

With so many political and economic uncertainties, we conclude – as we did last month – that despite recent gains now is a critical time for investors to prepare mentally and financially for greater turbulence ahead. This particular bull market will end – the question is not if, but when, and whether you are reacting to it, or prepared for it.

 

 

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Marble Trail Financial is a joint venture of Addison Advisors LLC dba Marble Trail Advisors, Davis Associates,  and Misasi & Company LLC. Investment advisory services are provided by Marble Trail Advisors, a registered investment adviser, and tax preparation and accounting services are provided by Davis Associates and Misasi & Company LLC.

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