The S&P 500 Index finished the third quarter at a record high. Notably, the closely followed index of U.S. stocks ran up its quarterly winning streak to eight consecutive quarters.
It’s done so in the face of three devastating hurricanes—Harvey, Irma and Maria, dysfunction and gridlock in Washington, and continued unsettling news from North Korea.
But in many respects, it shouldn’t be all that surprising because stocks take their longer-term marching orders from corporate profit growth. And profits are driven primarily by economic growth at home and abroad.
Currently, we’re in the midst of a synchronized global expansion, which has created a strong tailwind for earnings.
Moreover, interest rates remain near historic lows, and the Federal Reserve hasn’t been shy about signaling that any rate hikes are expected to come at a gradual pace.
If we had to concoct a recipe for a bull market, we’d definitely go heavy on profits, economic growth, and low-interest rates—Oh, wait a minute—that’s today's environment!
Now, we understand the devastating hurricanes have changed lives and wrecked property in Texas, Florida, and Puerto Rico. If you are so inclined, please consider donating to relief efforts. Short term, the economic data is taking a hit from the storms. Longer term, it’s unlikely to have much impact on the economic trajectory of the U.S. economy.
While North Korea’s quest for an ICBM that can strike the U.S. is very unsettling, short-term investors seem to be pricing in the unpredictability of the rogue regime. More importantly—speaking strictly from an investment perspective—investors aren’t anticipating a disruption in the economic cycle.
So, while you should be prepared for more troubling news, it simply isn’t affecting U.S. economic activity.
Table 1: Key Index Returns
|Dow Jones Industrial Average
|S&P 500 Index
|Russell 2000 Index
|MSCI World ex-USA**
|MSCI Emerging Markets**
|Bloomberg Barclays US Aggregate Bond Index
Source: Wall Street Journal, MSCI.com, MarketWatch, Morningstar
MTD returns: August, 2017-September 29, 2017
YTD returns: December 30, 2016-September 29, 2017
**In U.S. dollars
Proposed Tax Reform
“Don't tax you, don’t tax me, tax that man behind the tree,” was attributed to the late Louisiana Senator Russell Long, who chaired the powerful Senate Finance Committee from 1966 to 1981 (NYT). He assisted with tax reform in 1986, and Congress is now considering the first major rewrite of the tax code since then.
The tax reform initiative that’s been proposed by the President and the Congressional Republican leadership is simply a blueprint. It must clear a number of hurdles before becoming law.
The framework is silent on how dividends and capital gains will be treated, and no mention has been made of the 3.8% surtax on investment income for high-income Americans.
The outline calls for special treatment for retirement accounts, but no other details were provided.
Therefore, anticipating and positioning for changes becomes very difficult given the uncertainty surrounding the bill.
Meanwhile, a 20% top corporate rate has been proposed, down from 35%. It’s roughly in-line with most developed nations and is expected to be supportive of stocks.
But it’s early in the game, and any discussion of the final points is purely speculative. We don't like to speculate so we won't.
We hope you've found this monthly update to be 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
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The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.