Market Pulse: A mixed bag
April 28, 2017
Stocks are holding their own with the Nasdaq Composite reaching a new high, while many other indexes are near the top of their range.
Not bad considering what's happening (or not) in Washington and overseas (North Korea and Syria), the prospect of a few more rate boosts this year and the delay of healthcare reform, tax cuts and more spending. The economic news is neither uniformly good nor decidedly bad. It's a mixed bag, and investors through their inaction are taking it that way.
Bond investors are less optimistic. In my March 16 column on interest rates, I correctly noted that the prospect of steadily rising interest rates is not the certainty market participants seem to believe, and there were signs that just the opposite could be the case.
The yield on the 10-year Treasury has fallen from more than 2.70 percent to 2.27 percent. That is lower than it was at the end of 2015, yes, 16 months ago. Yields on preferred stocks and exchange-traded debt have been coming down as well and prices rising. Utility stocks are close to their all-time highs. The bottom line: demand for credit will be growing slowly along with GDP and long-term interest rates won't rise much, if at all.
As for equities, earnings ultimately determine stock prices and the post-election rally was due in part to the improving outlook for profits in a faster-growing economy. A lower corporate tax rate, which would immediately boost earnings by 7-10 percent, was one reason, and there was also the expectation that some relief will be coming in the treatment of foreign profits, more than $2 trillion of which are held overseas to avoid confiscatory taxation.
The delay in enacting tax legislation is disappointing investors, myself included. It could be done quickly and with bipartisan support. I say get on with it, and then deal with tax reform, a much more complex matter that was last addressed in 1986. The amount Americans pay in tax preparation is ridiculous.
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The market won't go sideways for long. Some catalyst, usually unforeseen, will propel it one direction or the other. Trouble with North Korea could briefly send it lower, unexpected progress in Washington on taxes or health care (or both) could push it higher.
The momentum in this long bull market is clearly to the upside. Expect profit-taking from time to time, even sudden declines that could be unnerving. In the past those were always buying opportunities. And they will be again.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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