It’s a holiday-shortened week this week and next, so I will just be doing an update on our market indicators today and next Tuesday (January 2).
We continue in that magical holiday period where U.S. stock prices tend to register above-average daily gains. Longer-term analysis (since 1885!) suggests that gains will peak on the fifth of January before turning lower until just after mid-month.
I have observed that the holiday season of positive gains has been shortening in recent years. For example, based on just 20 years of data, the year-end holiday period has been concluding at the end of the first trading day of the year. That would make for a short-term top on Tuesday (January 2) next week as opposed to Friday (January 5). In any event, this week historically has seen positive gains on very light volume.
Most of the year-end talk in the industry has been about the extra boost that the tax bill is going to give to the economy, principally over the next two years (but note the positive rate reductions for individuals have a targeted life expectancy of at least five years, baring a change in Congressional control by the Republicans).
At the same time, there is concern that the yield curve (the difference between the interest rates of longer-maturing Treasury bonds and the short-term Treasury bills) is flattening. This is looked at as an early recession warning. Most of my research, however, suggests that a recession does not appear on the horizon until rates actually invert (long-term bonds are yielding less than short-term Treasury bills). That seems a long way (over a year) off at the present time.
Additional concerns have been raised about the effect of all of the major economies that have either already begun moving away from monetary easing (USA) or that are about to start doing so (EU and Japan). The fear is that having this happen in unison will have a deleterious effect on global economic health.
While such unanimity in action has been relatively rare in the last decade, it does appear that all of the governments involved are taking a very measured approach to this, and at the present time, it does not look to be a problem to this observer.
Last week I mentioned that one of the best things about the new tax bill is that it gives cover to the Federal Reserve to reload its ammunition. It needs to get rates higher to allow it to be better able to fight the next recession. By increasing rates, they can get interest rates to a level where their subsequent reduction in the face of a recession can actually have an effect in reviving the economy.
An additional positive with the tax bill is that we are finally having a more balanced approach from Washington to the economy. Ideally, we would like to see fiscal and monetary policy both being employed.
However, once the $800 billion bipartisan infrastructure program was voted on in President Obama’s first year, Congress and the president took a near decade-long vacation from any fiscal policy involvement in the economy. Monetary policy engineered by the Fed was the sole economic governor.
Now the Congress and the president are back on the same page. The tax bill is the first of the fiscal stimuli. It is not likely to be the last. Talk is already emerging of a new infrastructure bill, although it is scaled back not only from the 2009 version but also from President Trump’s campaign rhetoric. However, regardless of its size, the combination of this fiscal stimulus with the tax bill’s should be more than enough to counteract the monetary slowing that the Fed’s action is likely to occasion.
Most analysts are projecting a continuation of the stock market gains this year. However, most do not see the gains being as big. While the average 12-month gain expected at the beginning of 2017 was 10.23%, today the projections are averaging 7.23%. My own expectation is for smaller gains than last year but at a higher, double-digit level than analysts are now projecting.
At the same time, I have warned that a correction or pause is long overdue and that I would not be surprised if it began next month (although it may have already begun right after the passage of the tax bill—the jury is still out on that). I hasten to add that any decline will likely be minor and that it should not cause investors to change their focus from being on the longer-term expected gains in equities.
That’s it for this week. Enjoy the New Year celebration, but approach it with moderation as you realize our wish for you all: a happy, healthy, and prosperous new year.
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