An Earnings And Potential Tax Reform Fueled Advance

By: Kent Engelke | Capitol Securities

Equities advanced as corporate results and housing data bolstered optimism in the economy. There is also confidence the Trump administration will propose meaningful tax reform and continued relief over the French election. I will also write the markets are dictated by momentum traders, strategies not based on economic and security analysis, but rather by moving average lines.

I believe all markets can decline 3% to 5% in quick order if any mega-capitalized international growth company posts a disappointing profit report, the inevitable delay of the President’s legislative agenda, or a significant increase in geopolitical tensions. Additionally, I believe valuations are stretched.

On the other hand, if there is a transfer of wealth into the real economy, I believe the advance can be maintained, but with a transition from Wall Street companies to Main Street firms. Main Street will be a direct beneficiary of any regulatory and tax reform thus permitting faster job creation.

As noted many times, approximately 90% of jobs created from 1996-2007 were from small business, defined as companies with fewer than 400 employees. If Main Street again receives funding, the job creation machine will return.

Yes, there are some labor shortages in the STEM industries, however there is a vast pool of potential workers based upon the anemically low labor participation rate (LPR).

Small business creation is often funded by homes. The housing data is robust, thus suggesting a funding source is available. If monies do gravitate into the real economy and if job creation accelerates, the result of greater small business creation, perhaps a 3% to 4% growth rate is achievable.

Speaking of which, tomorrow initial estimates of first quarter GDP is released. Trump induced confidence levels have not yet translated into greater economic activity, but few of Trump’s pro-growth proposals have been enacted.

What will happen today?

Last night the foreign markets were mixed. London was down 0.10%, Paris was down 0.02% and Frankfurt was down 0.11%. China was up 0.20%, Japan was up 1.10% and Hang Sang was up 0.50%.

The Dow should open quietly lower. The 10-year is unchanged at 2.33%.

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