Of Bonds and Bitcoins

 

It’s good for everyone when stocks keep rising.

On Wednesday the Dow Jones Industrial Average closed above 26,000 for the first time ever, while the S&P 500 registered its first post-2800 close. The Dow and S&P sold off a little bit, but the Nasdaq Composite index topped 7300 in Friday’s trading. Another day, another milestone, it seems, in this market.

This is when people like me start worrying about what could possibly go wrong, and if you scan the headlines, you’ll find two big concerns—bonds and bitcoin (and other cryptocurrencies).

As I wrote here and in my MarketWatch column last week, bond yields have risen steadily over the past few weeks as investors have sold out of fear of a stronger economy and looming inflation. (When investors sell, bond prices fall and yields rise to attract buyers.) Some have warned that could cause a big correction in stocks.

The other big news is bitcoin, which fell Wednesday (just as stocks peaked) to $9,200, having peaked at $19,500 per coin at the height of the frenzy in December. On Friday, it had rallied back to $11,600.

Do either of these pose any danger to stocks?

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Do Bonds Signal Trouble for Stocks?

 

This week, despite a strong auction, the benchmark ten-year U.S. Treasury note’s yield hit a nine-month high of 2.6% Wednesday. The alarm bells started ringing.

The day before, former bond king Bill Gross, whose track record has been mixed at best, especially during the latter years of his tenure with Pimco, declared a bear market in bonds had been “confirmed” because rate increases had broken the multiyear down trend in yields. (He later said, “bonds, like men, are in a bear market,” but I won’t go there.)

On Wednesday afternoon I spoke with technician Craig Johnson, who has a consistently good long-term bullish track record. He told me yields were heading higher and the 36-year-long bull market in bonds was probably over.

Meanwhile, on Thursday, the Dow Jones Industrial Average, the S&P 500 index, and the Nasdaq Composite index all hit new all-time highs, and show no signs of stopping.

As I wrote in MarketWatch, Johnson urged clients to take some profits in advance of a potential 20% correction in stocks brought on by increases in bond yields.

Should you sell?

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This Market Just Won’t Quit

 

In the old days, a disappointing monthly jobs report like the one we got Friday morning would have given investors pause. This time, they didn’t even blink.

In December the U.S. economy added only 148,000 jobs, a big drop from November’s 228,000. Unemployment stayed at 4.1% and wage growth remained a tepid 2.5% annually.

Maybe that led savvy investors to conclude that the Federal Reserve under new chairman Jerome (Jay) Powell would stick to its roadmap of only three increases in the federal funds rate this year.

Or maybe they didn’t care and just kept buying.

On Friday the S&P 500 index closed—yawn—at yet another all-time record high above 2,700, while the Dow Jones Industrial Average finished above the magic 25,000 threshold again while the Nasdaq Composite index easily topped lucky 7,000 once more. The increase of 2% since trading resumed Tuesday was the best weekly gain in a year.

Is this for real or did investors imbibe too much bubbly on New Year’s Eve?

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A Long but Not Wild Ride in 2017

 

If I had to compare 2017 in the markets to one thing, it would be a roller coaster that kept rising with few dips or drops.

That meant fewer thrills and chills for sure, but it certainly made investors richer.

As I write this, my last market commentary of the year (we’re taking next week off), the Vanguard Total Stock Market Index ETF (VTI) had risen 21% for the year, while the Vanguard FTSE Developed Markets ETF (VEA) was up a bit more, 24% through Thursday.

Emerging markets and technology stocks did even better: The iShares MSCI Emerging Markets ETF (EEM) has gained 33% while the Technology Sector SPDR ETF (XLK) has advanced 36% thus far in 2017.

It was, in short, a good year to take risk, and the CBOE Volatility index, the VIX, reflected that. It spiked three times this year above 15—in April, May, and August—but didn’t stay there long. What I call the market’s complacency index spent most of the year near historic lows, in single digits. As I write this, it’s around 9.5.

So, should we all just relax and count our profits?

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Tax Cuts + Steady Fed = Record Highs

 

Late Friday, two key senators spoiled the political media’s efforts to gin up some last-minute suspense over next week’s final vote on the tax cut bill.

Senators Marco Rubio (R-Fla.) and Bob Corker (R-Tenn.) said they would vote “yea” on the final version of the Tax Cuts and Jobs Bill that emerged from a conference reconciling the two versions passed by the House of Representatives and Senate.

Sen. Rubio had unconvincingly positioned himself as a holdout to get a bigger child credit for low-income families, while Sen. Corker had opposed the original bill. The bogus media “suspense” was because Sen. John McCain (R-Ariz.) was back in the hospital in connection with his cancer treatment and may not be able to cast a key vote in a chamber that leans 52-48 Republican.

But now, the House and Senate are ready to pass the revised bill and send it on to the White House for President Trump’s signature. Neither he nor the Republican congressional leaders have said they are tired of winning yet.

That was enough to give the markets a late-day shot in the arm. The Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite index closed at record highs. All three are approaching major benchmarks—the Dow is headed for 25,000, the S&P for 2700 and the Nasdaq for 7,000.

It wasn’t only tax cuts, though.
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An Early Gift to the Fed and Investors

 

Christmas is less than three weeks away and Hanukkah starts Tuesday night, but the economy gave us our presents early.

On Friday, the Labor Department reported some 228,000 new jobs were created in November, slightly less than the 244,000 created in October but much better than September’s 38,000.

Over the last three months and thus far in 2017, monthly job gains have averaged around 170,000, for a yearly total of two million net new jobs. That’s pretty good, but entirely in line with 2016, the last year of the Obama presidency.

Unemployment remained steady at 4.1%, and wages increased at about 2.5% measured annually.

So, where’s the big gift in all this?

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Who Says Stocks Can’t Go to the Sky?

 

It seems stocks have nowhere to go but up.

From November 15th through Thursday’s close, the Dow Jones Industrial Average added 1,000 points and topped 24,000 for the first time ever. The Standard & Poor’s 500 tacked on 80 points (more than 3%), while the Nasdaq Composite index rose by 200 points to close above 6,900 Tuesday before retreating a bit.

Those gains were no doubt powered by Wall Street’s almost mystical belief in the healing powers of tax “reform,” which passed the House of Representative on November 16th. As I’m writing this Friday afternoon, Republican leaders were confident they had the votes to get this massive piece of legislation through the Senate.

This bill, which cuts corporate tax rates to 20% from 35%, eliminates the alternative minimum tax, and phases out the estate tax, is almost perfectly designed to help corporations, CEOs, family dynasties, and shareholders, both big and small. It probably won’t spur a lot of job creation, but all stock investors care about is boosting corporate earnings, which in turn power share prices higher.

So, now that tax cuts look like a done deal, can anything stop this market from going higher?

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One Down and One to Go

 

On Thursday the House of Representatives passed the Tax Cuts and Jobs Bill by a surprisingly decent margin of 227-205, and for a day at least investors cheered.

The Dow Jones Industrial Average gained 187 points Thursday while the S&P 500 tacked on 21 points as investors celebrated the long-awaited milestone.  Senate Majority Leader Mitch McConnell promised to put that body’s version of the legislation up for a vote after Thanksgiving.

The plan would permanently slash corporate tax rates to 20% from the current 35%; reduce the number of tax brackets; eliminate personal exemptions while doubling the standard deduction and child tax credit; cut rates for some “pass-through” businesses, and end the alternative minimum tax and phase out the estate tax.

To recoup enough projected revenue losses to get the bill through the Senate, the House plan ends deductibility of state and local income taxes and caps the amount taxpayers can deduct for medical expenses, mortgage interest, and property taxes.

But the big deal here for investors (and big political donors, who pushed Republican congressmen hard on this bill) is the corporate tax cut, which was on a percentage basis the largest we’ve ever seen.

Here’s why so much is riding on it.

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As Tax Cuts Go, So Go Stocks

 

When markets closed Friday, stocks finished with their first down week since September—and you can blame it on tax cuts.

On Thursday, Senate Republicans unveiled their own tax cut plan a week after their counterparts in the House released their blueprint. (I’m calling it a “tax cut” plan, because that’s what it is, not tax “reform,” which, as in 1986, entails a much deeper change.)

The Senate plan preserved most of the essential features of the House’s, especially a new, permanent statutory corporate tax rate of 20%. (It’s now 35%, although the rate companies actually pay is much lower.)

But there was a big “but”: The Senate Republicans’ plan delayed that rate cut until 2019, one year later than the House bill’s start (based on the optimistic assumption Congress acts like a real legislative body and passes the bill by next year).

That was enough to throw markets into a mini-tizzy. The S&P 500 fell 12 points from its Wednesday all-time closing high near 2,600, while the Dow Jones Industrial Average is off roughly 140 points from its own closing peak. Both fell slightly on the week.

Are stock prices that closely tied to tax cuts?

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Trump and GOP’s Two Big Gifts to Wall Street

 

On Thursday, President Trump promised Americans “a big, beautiful Christmas present.” He wasn’t talking about the new iPhone X, which sold out soon after they went on sale at Apple stores Friday.

No, he was referring to the new tax reform plan unveiled by House Republicans Thursday which, they promised, would “jump start” an economy already growing at 3% a year and where unemployment hit 4.1% last month.

But there was another gift President Santa unwrapped eight weeks early while temperatures on the East Coast topped 70 degrees: Jerome Powell, his pick for the new Federal Reserve chairman. (Never mind that he had called the current Fed chair, Janet Yellen, a “spectacular person” who was doing a “terrific job.” When push came to shove, he told her, “You’re fired!”)

The biggest beneficiaries of the president’s and Republicans’ early generosity won’t be America’s good little girls and boys. Nor will they be the much-lauded but little rewarded American middle class. Nope, the biggest winners will be the super-rich, big corporations and corporate executives, and the investors who own their stock.

Here’s how it breaks down:

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