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As stocks close in on completing the ninth year of the bull market, the recently enacted tax reform plan has acted as an accelerant. The reduction in the corporate tax rate from 35 percent to 21 percent will add significantly to company profits. A key question is whether the lower tax rate will translate to lasting long-term growth.
While America’s politics are as polarized as ever, the stock market seems to be one of the only apolitical mechanisms left in the country. When President Trump asks, “How is your 401(k)?” he is attempting to claim credit for the 40 percent increase since the 2016 election, or at least the 30 percent rise since his inauguration. Yet no acknowledgement is made that the stock market tripled under President Obama. When it comes to the performance of the stock market, laying too much credit—or blame—on the doorstep of any president is an insult to the U.S. citizens who shape and fuel our dynamic economy.
Since hitting its Great Recession bottom on March 9, 2009, the Dow Jones industrial average has vaulted from 6,547 to its current all-time high of 26,000. The bipartisan stock market has ascended a cumulative 400 percent, or 16.6 percent annually—an impressive feat.
Now comes the hard part. Stocks are no longer inexpensive when it comes to business valuation, and certain behavioral traits are starting to appear that should raise caution.
The record high in stocks is attracting record inflows of new cash into stocks. BlackRock, the world’s largest money manager, gathered the equivalent of $1 billion per day of new client cash in 2017. Investors last year poured $367 billion, or $698,000 per minute, mostly into the firm’s index funds and ETF products.
Investors who were reluctant to buy stocks in 2009 when they were cheap are eagerly snapping them up in 2018 at all-time highs after a fourfold rise. FOMO, or fear of missing out, is a characteristic often present in the late stages of bull markets. Risks are ignored as higher prices beget more buying.
The mania taking place in Bitcoin and cryptocurrencies points to bubble-like behavior. While this theater has nothing to do with stocks, it is evidence that people will clamor to participate in a concept where it’s impossible to reach any rational fundamental valuation.
The financial media is beginning to do its part in sensationalizing the market’s moves, even though each 1,000 points gained on the Dow today is far less impressive from a percentage standpoint than at the beginning of the bull market.
Acclaimed value investor Jeremy Grantham recently wrote that there are not enough signs of euphoria yet to make this look like a late-stage bubble, although he believes they have begun to pick up. Grantham thinks there could be one final melt-up to the market over the next two years or so. Still, his firm projects that, over the next seven years, the only asset class that will generate positive real returns is emerging-market equities.
The stock market is likely to become more volatile as the effect of tax reform plays out in quarterly earnings reports over the next year. Investors should be poised to take advantage of the opportunities provided by sharper moves in stock prices, on both the upside and downside.•
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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. Views expressed are his own. He can be reached at 317-818-7827 or ken@aldebarancapital.com.
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