Everyday, Everyday I Have the Blues
By John Stoltzfus,
Chief Investment Strategist
To Be or Not To Be
Whether or not tax reform passes the economy and the markets seem in good stead for now
We persist in thinking that whether or not tax reform gets to see the light of day, the economy and the markets are likely to remain in good stead for the foreseeable future as fundamentals comprised of a stateside economic expansion (albeit at a moderate pace), relatively healthy corporate revenues and earnings, and a persistent economic recovery in the international realm progress.
While some skeptics and bears seem intent on tying the equity markets’ weakness since the start of November to political uncertainty in Washington, we see the current malaise in these markets as routine and mostly linked to broad issues that include year-end seasonality (tax loss selling, some profit taking, as well as portfolio rotation and rebalancing).
A normal level of uncertainty generated by all of the above activities is naturally exacerbated near term by the “if, when, and what” of any tax reform package that might survive the political gauntlet and influence how to best position portfolios.
Markets in general (and particularly the current long running bull market) are constantly seeking catalysts to determine their next move and direction.
With earnings season now pretty much in the rear view mirror (almost 95% of S&P 500 companies thus far reported), the next catalyst has yet to appear.
We’d expect that some determination or at least some clarification as to the probability of tax reform would help the markets decide their next move. We and others believe that small cap and value stocks could rally if a tax reform bill were passed. So far the uncertainty around tax reform in our view has held them in abeyance for much of this year with the exception of the third quarter when sentiment surged on expectations that tax reform was more likely than not.
In the interim, markets will have to make do with the daily flow of economic data along with the conclusion of the third quarter earnings season (see earnings report card on page 4 of this report).
“We saw no evidence of irrational exuberance or animal spirits in any of the meetings we attended last week; In our view there’s enough to be thankful for.”
The week ahead
In a holiday-abridged trading week with curtailed trading hours and expectations that a determination on tax proposals won’t happen until after politicians return from the holiday, stocks stateside could likely churn through this week barring any kind of surprise.
Key Economic data for this week will be concentrated in the first three days of the week with the LEI (Leading Economic Indicator) today followed by existing home sales (Tuesday), initial jobless claims (Wednesday), the Fed FOMC October minutes (Wednesday) and durable goods orders (Wednesday).
In our travels last week meeting with private and professional investors in Chicago, Denver and Scottsdale we continued to find most investors focused on issues tied to the chronological age of the bull market, the activity in Washington around possible tax reform, geopolitical risk, curiosity and concern about Bitcoin, interest rates and market valuations. We saw no evidence of irrational exuberance or animal spirits in any of the meetings we attended last week.
In our view there’s enough to be thankful for.
We wish our readers a happy and safe Thanksgiving holiday.
For the complete report, please contact your Oppenheimer Financial Advisor.
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