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?
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?
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?
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?
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?
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?
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: