By: Kent Engelke | Capitol Securities
Stocks led by the household technology names rose above its 100 day moving average on very anemic volume, the result of decreased political tensions and building momentum to reform the tax code. As noted many times, tax reform is essential to ensuring greater economic growth.
In my view, four major components are already in place for greater potential growth — rising home prices, record job openings for qualified workers, rising monetary velocity and regulation freeze/reduction. However, tax reform in my view is the biggest variable.
The tax payer, not the government, is the best steward of one’s monies.
Commenting further about the lack of breadth in the markets, hedge fund after hedge fund, active money manager after active money manager, are discussing the danger of today’s imbalanced market, the result of ETFs and indexing. Ten years ago, the total capitalization of ETFs was about $400 billion. Today it is over $3 trillion.
Bloomberg writes there is a historic low macro and micro correlation, defined as how closely stocks move versus each other. It is around 18%, which is the lowest reading since 2004. One year ago, it was 60%.
It is widely known that 40% of 2017 S&P 500 return is focused in a sector that comprises around 20% of it capitalization, more specifically the return of five companies.
Many of the bulge bracket firms — firms that pioneered ETFs and indexing including Blackrock, Fidelity, Vanguard, JP Morgan, Merrill Lynch — are all predicting a decline in the averages, primarily the result of narrow based markets, the concentration of funds in passive investments, the structure of which is not known, declining earnings and rising interest rates.
If the markets do decline, this would be the most predicted decline in history.
I reiterate my view that there is a transition from Wall Street to Main Street, monies gravitating into the real economy. During this transition, the averages may decline 7% to 10%, but the typical company advances. In other words, the complete inverse of the last 4 years.
It is often written it is darkest before its brightest dawn. For those who still ascribe to fundamental security and macro-economic analysis, the moment is very dark.
Is tax reform the elixir for the return of yesterday where sector analysis was pivotal for security selection?
I think yes, but only history can answer this question.
What will happen today.
Last night the foreign markets were up. London was up 0.03%, Paris was up 0.07% and Frankfurt was down 0.01%. China was down 0.08%, Japan was up 0.26% and Hang Sang was up 0.91%.
The Dow should open moderately lower on Trump’s threats to end NAFTA, a point that he made during the campaign. European manufacturing data suggested the region’s growth will be stronger than expected. The 10-year is unchanged at a 2.21% yield.