Stop us if you’ve heard this one before; the stock market went up last week. We will double check but we think that is 700 weeks in a row (lame humor attempt). The Dow Jones Industrial Average was up 1.30%, the S&P 500 gained 0.89%, the NASDAQ rallied 1.37% and the Russell 2000 was good for 0.56%.
At close to 20% YTD for the S&P 500 the index is likely to close out the year up a lot. The stock market has an up year almost 75% of the time but it doesn’t necessarily go up a lot like it has in 2017 all that often. Without going down an ideological path, most advisory practices probably heard from about half of their respective clienteles expressing concern about the election result and of course it has gone up under the new President, as it did under his predecessor, which is a good reminder that the stock market often does what people do not expect…like go up a lot when the person they didn’t vote for ends up winning the election.
The GOP tax bill is moving through the Senate as some prominent “nays” have switched their votes increasing the odds it passes. The general perception is that it helps corporations far more than it helps individuals which is being taken as a bullish catalyst for higher equity prices. Barron’s cited a report from UBS which calls for the tax bill to add 7-9% of earnings growth for the S&P 500. The perception of better for corporations has been a part of the debate over this bill for weeks if not longer which raises a reasonable question of whether the passage, and subsequent favorability for corporations is already priced in. Has it been a driver of equity prices; the S&P 500 up 7% over the last three months. It seems to be generally accepted that the tax bill will increase the deficit even if there is disagreement over by how much and we admit to be confused as to why there seems to very little concern about this by those voting for the bill.
The Wall Street Journal reported on a survey conducted by Boston Consulting Group that shows seven out of ten investors as being bearish on US stocks headed into 2018, believing them to be overvalued. There are a few ways to take this. One is as a contrarian signal that the gains can continue. It can be taken on its face that these investors will begin to reduce exposure which would put downward pressure on stock prices. Valuation, the price you pay for a stock or ETF, clearly matters but there is very little in the way of predictive utility in telling you when high valuations will actually weigh on prices. The CAPE PE Ratio has been high all the way up, going on nine years. One theory we saw floating around is that now as 2018 is starting the lows in earnings from the financial crisis will start to roll off the CAPE PE and it will no longer be overvalued, or maybe it would be more correct to say less overvalued. If nine years of a high CAPE hasn’t driven equity prices, we’re not sure why a lower CAPE, should the theory play out, would then start to drive equity prices.
VelocityShares launched a suite of ETNs that offer 4X leverage pitting the US dollar against the Australian dollar, the Swiss franc, the euro, the British pound and the Japanese yen. There is a corresponding long and short ETN for each of the five currencies. While 4X would be a lot of leverage in most asset classes,not so in currency trading. With the key word being trading. Currencies don’t typically have huge moves but every now and then they do and holding on during a 20% move that goes the wrong way in the underlying currency pair would almost be a death blow to the position.
I am in New York City for a couple of days this week. More to come later in the week on this. The first picture is the view from the Airbnb where I’m staying and the firehouse is a pretty iconic FDNY station.
Source: Google Finance, Yahoo Finance, Wall Street Journal, SeekingAlpha, Bloomberg, Ycharts.com, Reuters, Barrons, ETF.com, XTF.com, Bespoke Investment Group, CME Group, ESPN