Any thoughts that 2018 might start with a pause in the bull market were quickly dispelled in the first week of the year. A “buy the rumor, sell the news” view on tax reform has shaken out to be more aptly described as buy the rumor and buy the news.
In my opinion, the credit goes to the dramatic reduction in the corporate tax rate—from 35% to 21%, beginning in 2018.
On January 1, analysts were forecasting a 12.2% rise in Q1 2018 S&P 500 profits (Thomson Reuters) —pretty impressive. By January 31, analysts had sharply raised the Q1 estimate by a full 5 percentage points to 17.2%.
There’s only one word to describe the dizzying upward surge in estimates—astounding. And it’s not simply Q1 2018; analysts have sharply boosted profit outlooks for all four quarters.
It's important to note that earnings and expectations of earnings play a big role in the stock market price equation. The run-up we’ve witnessed, in my view, is due to investors pricing in a much rosier profit outlook.
Warren Buffett, who called the cut in the corporate tax rate a “big deal…a huge, huge reduction,” summed it up this way in a CNBC interview in the middle of last month:
“You had this major change in the silent stockholder in American business, who has been content with 35%…and now instead of getting a 35% interest in the earnings (he noted foreign earnings from U.S. firms are more complicated), they get 21% and that makes the remaining stock more valuable.”
It’s a unique and colorful way to describe the new tax regime.
By month’s end, a modest bout of volatility re-entered the landscape, as investors took note of an upward creep in Treasury bond yields. It’s a reminder that stocks don’t rise in a straight line.
Time to time?
Let me end this month’s market update with a recent comment by Burton Malkiel.
He’s not a household name like Buffett, but he is the author of A Random Walk Down Wall Street, a well known and well-respected book published in 1973.
“I think one of the cardinal rules of investing is don’t try to time the market. And the reason is that you’ll never get it right. I’ve been around this business for 50 years and I’ve never known anyone who could time the market, and I’ve never known anyone who knows anyone who could time the market. You can’t do it. It’s very dangerous.”
Table 1: Key Index Returns
|MTD %||YTD %||3-year* %|
|Dow Jones Industrial Average||5.8||5.8||15.1|
|S&P 500 Index||5.6||5.6||12.3|
|Russell 2000 Index||2.6||2.6||10.6|
|MSCI World ex-USA**||4.6||4.6||6.3|
|MSCI Emerging Markets**||8.3||8.3||9.3|
|Bloomberg Barclays US |
Aggregate Bond Index
Source: Wall Street Journal, MSCI.com, MarketWatch, Morningstar
MTD returns: Dec 29, 2017—Jan. 31, 2018
YTD returns: Dec 29, 2017—Jan. 31, 2018
**in US dollars
We hope you've found this monthly update to be helpful and educational. If you have any questions and would like to discuss your portfolio or other important financial matters, please give us a call at (330) 836-7000 or schedule an appointment here.
Many happy returns on life,
Jonathan Torrens CFP®
President and Chief Investment Officer
TCM Wealth Advisors