The big story last week was the Dow Jones Industrial Average blowing through the 23000 level, thanks to huge near-$15-per-share gains in two of the price-weighted index’s most expensive components, United Healthcare and International Business Machines. Interestingly, the Dow’s quest for 23000 prompted an interview request from Fox Business last Monday as the television network came across a piece your editor penned for his Forbes Blog back in January.
I had to assure the producers more than once that Dow 40000 by 2030 was still my prediction, which I was only too happy to do, and I explained on air that such a seemingly optimistic view would actually see stocks appreciate in price by less than the long-term norm. I had to add that I am not bearish on stocks, given that making it “only” to 40,000 over the next 13 years would imply returns below the long-term norm. Obviously, the Miracle of Compounding has plenty of time to work its magic by 2030.
We would argue that last week’s gains had more to do with solid economic data, including weekly first-time filings for jobless benefits falling to the lowest level in 44 years, and favorable Q3 earnings reports, with Bloomberg calculating that an impressive 75.9% of the 87 S&P 500 members out with results thus far have exceeded EPS estimates. But, we understand that many attribute the advance to the progress made on Capitol Hill on tax reform.
While we think The Wall Street Journal said it well with, “The sprint toward an enormous tax bill has reached the starting line,” we suspect that many were surprised that the Senate was actually able to pass a budget on Thursday, an important first step to a tax bill that could become law without a single Democratic vote. No doubt, there is a long way to go before tax reform will materialize, but, unlike Treasury Secretary Steven T. Mnuchin, who warned last week that failure to pass the Republican tax overhaul would trigger a “significant” drop in the stock market, we do not think the markets have discounted much in the way of corporate tax relief. After all, low-tax payers have been the best performing stocks since the Election!
For those who think Congress will manage to significantly alleviate some of Corporate America’s tax burden, the broadly diversified listing of two-dozen undervalued high-tax payers arguably would be big beneficiaries. The stocks include: American Railcar, Tutor Perini, Trinity Industries, ManpowerGroup, MDC Holdings, Capital One Fin'l, Oceaneering Int'l, CVS Health, Tyson Foods, Aetna, Cardinal Health, Kimberly-Clark, Allstate, Walt Disney, Comcast, DWS Inc., Kohl's Corp, Williams-Sonoma, Foot Locker, Target, AT&T, Norfolk Southern, Delta Air Lines and FedEx.
Not surprisingly, Mr. Mnuchin was not the only one to sound warning bells last week, especially with the 30th Anniversary of the Crash of ’87 taking place on October 19. Obviously, stocks have come a long way with little in the way of downward movement, so we certainly understand that folks might be nervous that the rally will soon give way to a significant downturn. Indeed, history shows that 5% pullbacks happen, on average, more than twice a year, with 10% corrections taking place every 11 months or so, on average.
Of course, advances of those same minimum magnitudes have come just as frequently, BUT have lasted longer and delivered much bigger gains. As such, just as we say when equities are enduring one of their inevitable bouts of selling, we offer the friendly reminder that the secret to success in stocks is not to get scared out of them, along with the admonition that far more money has been lost in trying to avoid selloffs than has been lost in the trips south themselves.
That said, we know that it isn’t easy to ignore the market pundits calling for an end to the rally, even as some of the data points they cite are questionable. For example, one strategist expressed concern that fund manager cash balances have fallen to the lowest level in two and one-half years, yet the 4.7% current level remains above the 4.5% “Buy” signal threshold.
Others have argued that investors are somehow euphoric, even as the most recent AAII Sentiment Survey and Mutual Fund/ETF Flow data from the Investment Company Institute (ICI) vehemently argue otherwise.
To be sure, we respect that more recent numbers than those from ICI via fund watcher EPFR Global show significant inflows into domestic equities, but EPFR reported that investors pulled roughly a net $36 billion out of U.S. stock mutual and exchange-traded funds in the third quarter.
---------
View a complete list of all previously recommended stocks here.
