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?
We got a hint on Friday morning, when former National Security Adviser Michael Flynn pleaded guilty to a single criminal count and is cooperating with Special Counsel Robert Mueller’s investigation of Russian interference in the 2016 presidential election, which may include testifying that President Donald Trump ordered him to meet with Russians.
In response, stocks sold off before recovering nicely from their lows, presumably because if Mueller has evidence the president colluded with Russia or obstructed justice, it could unleash domestic, and perhaps international, turmoil. To me, it looked more like the market catching its breath than investors throwing in the towel.
If tax cuts are passed and signed into law, I’m pretty sure stocks will continue to move up for a while, powered by good economic growth, higher profit margins, and low interest rates. The big risks on the economic side are a new burst of wage inflation and if incoming Federal Reserve Chairman Jerome Powell raises rates more aggressively than he has pledged or investors expect.
Above and beyond all that is the specter of a second Korean war, whose impact would range from very bad to cataclysmic. That risk is rising, as North Korea shows no signs of stopping tests of ever more powerful and sophisticated missiles.
Ultimately the likelihood and consequences of war are unknowable, which is why I recommend in your GoldenEgg Investing® retirement investing plans and in my recent MarketWatch column that you consider taking some profits and reducing your stock holdings to limit risk as the market continues to rise.