What does Tax Reform Mean to the Stock Market?
People are scared. Many investors believe stocks have been rising because a new tax reform package will pass, and if it doesn’t, stocks will get crushed. With the stock market at new highs and the last crash fresh in their minds, many are convinced that a crash is inevitable.
I agree that this market is scary. However, in my 33+ years of managing money, I have never seen a time when things were positive and we all felt good about it. In fact, there is a reason for that.
It’s called investor sentiment and if you think about it, the concept is pretty simple. When investors are largely positive they are fully invested. At that point there is little money left on the sideline to fuel a leg higher for stocks.
On the other hand, when people are negative, there is a lot of fuel on the sidelines to push the market higher. Usually it comes out gradually, “climbing a wall of worry”….Which is what we have now.
It is important to understand that bull markets do not die of old age. They end when the economic backdrop turns negative.
There is no question that investors should be cautious given that we haven’t had a recession in almost 10 years nor a 10% correction in almost 2 years. Therefore, they must still exercise extreme caution with their investment portfolio and have a “Tactically” managed strategy. Never Passive or what we call buy-and-hold, AKA, buy-and-hope.
That said, there are 4 indicators that I believe still show life in this market.
- Earnings continue to be strong
- There is no recession on the horizon. In fact, quite the opposite. We are witnessing a global synchronized recovery.
- Credit flow is strong. This is a big one. When the banks stop lending, that’s a big red flag.
The wild card is Tax Reform. Many people believe that if tax reform doesn’t pass the market will crash. I disagree. I don’t think the market has been going up due to that. To me it is rising due to what we already have: The fact that taxes won’t go up and that regulation will at least be less, not more. A tax plan will be gravy.
Feel free to contact me with any comments or questions.