Tax Troubles Torpedo Stocks (Again)

Investors have been eagerly anticipating tax cuts since President Trump’s inauguration nine months ago. But as they survey the dysfunctional landscape of Washington, DC, they’re now saying: Ain’t gonna happen.

Tax cut pessimism weighed on stocks Friday, with the Dow Jones Industrial Average and the S&P 500 closing in the red. But strong earnings from bellwether technology stocks helped mitigate losses for the tech-heavy Nasdaq, which closed in positive territory. The Dow and S&P 500 broke their eight-week winning streak.

Senate Republicans on Thursday introduced a tax bill that would delay by a year the lowering of the corporate tax rate to 20%. The House and Senate tax bills are very much at odds. Increasing numbers of Senators are pushing back at both versions.

Some Senators are complaining that the tax proposals would add to the deficit, which in turn would force a super majority of 60 votes for passage.

Anyone who thinks the divided Senate can reach 60 votes on anything hasn’t been paying attention.

The notion of a tax cut delay particularly rankles investors. They’ve been waiting for the corporate tax cut all year, the way a kid looks forward to Christmas. It’s dawning on traders that all they’ll find in their stockings is a lump of coal.

It didn’t help when former Federal Reserve chief Alan Greenspan threw cold water on the idea of tax cuts. On Thursday, Greenspan exhibited his usual dour presence, saying big tax cuts would be unwise.

“Economically, it’s a mistake to deal with sharp reductions in taxes now,” Greenspan told Fox Business. “We are premature on fiscal stimulus, whether it’s tax cuts or expenditure increases. We’ve got to get the debt stabilized before we can even think of those terms.” 

That’s not what investors wanted to hear. As we saw on Thursday, disappointment over tax policy tanked the markets on Friday.

Emerging predictions of doom only worsened Wall Street’s mood. Growing ranks of analysts say a correction is only a matter of time. Some say it has already started. But technology remains a bright spot.

Tech poised for future gains…

The sizzling technology sector is one of the big investment stories of 2017. Tech’s outsized growth should continue into 2018.

The benchmark Technology Select Sector SPDR ETF (XLK) has generated a year-to-date return of 31.67%. That’s nearly twice the YTD total return of 16.68% for the S&P 500.

As this aging bull market wheezes through its ninth year, tech stocks are among the most appealing growth opportunities.

Tailwinds propelling tech companies include strong global economic growth, huge cash reserves, confident consumers, and rapid innovation.

One of the biggest gainers of the day was NVIDIA (NSDQ: NVDA), which closed the session up 5.27%. The virtual reality chip maker posted huge beats on its top and bottom lines for its fiscal third quarter.

In the days ahead, further batches of corporate earnings reports and economic data will help determine whether momentum sectors, such as technology, can continue to buoy the bull.

You should look for companies with strong balance sheets, good products, market domination, and quality management. Emphasize long-term ownership of a company, not just the chance for quick appreciation based on temporary sentiment.

Spend less time fretting about daily crises and more time planning strategy.

Remember that unstoppable trends always “trump” political theater (so to speak). And that goes for tax reform, which has become a train wreck. Let’s do the numbers.

Friday Market Wrap

  • DJIA – 0.17% or -39.73 points, to close at 23,422.21
  • S&P 500 -0.09% or -2.32 points, to close at 2,582.30
  • Nasdaq +0.01% or +0.89 points, to close at 6,750.94

Friday’s Big Gainers

  • News Corp (NSDQ: NWSA) +5.15%

Media empire’s quarterly profits exceed expectations.

  • Bristow Group (NYSE: BRS) +4.27%

Helicopter operator posts surprisingly strong quarterly operating results.

  • Time Warner (NYSE: TWX) +4.09%

AT&T (NYSE: T) refuses to sell CNN to appease DoJ’s demand for closing its $85 billion merger with TWX.

 Friday’s Big Losers

  • Johnson Controls International (NYSE: JCI) -4.05%

Change in leadership at industrial products company makes investors skittish.

  • Cardinal Health (NYSE: CAH) -3.30%

Investors worry that health care products company is vulnerable to e-commerce.

  • National Oilwell Varco (NYSE: NOV) -2.92%

Major analysts cut price targets for oilfield services firm.

Letters to the Editor

“How do you feel about the airline sector?” — Jennifer R.

Mention airlines to some investors and they’ll make a face. The industry’s reputation isn’t great on Wall Street. Air carriers shoulder a lot of overhead. Union labor, high fuel costs, huge capital expenditures, federal regulations… the list goes on.

It’s an outdated caricature. Airlines are enjoying a resurgence. Economic growth, falling unemployment and greater consumer confidence are prompting people to buy tickets.

Perhaps that’s why Warren Buffett recently scooped up major stakes in the big carriers.

“Are homebuilder stocks a good bet?” — Carol D.

Housing sector data has been mostly positive over the past 12 months, a tailwind that boosts consumer confidence and gross domestic product growth. That’s manna for homebuilders.

Be forewarned, though. Tax proposals in Congress call for a steep cut in the mortgage interest deduction. Eliminating this popular deduction would clobber homebuilders. You may want to wait for events to shake out.

Questions? Drop me a line: — John Persinos

This Day in History

November 10, 1775: The United States Marine Corps is born.

During the American Revolution, the Continental Congress passed a resolution for the raising of two battalions of Marines. The Continental Navy used the battalions as landing forces. There are currently more than 200,000 active-duty and reserve Marines.

Number of the Day: 82%

Take note, cynics. A recent survey by the Pew Research Center found that 82% of Americans believe the American Dream is within reach. Only 18% believe it’s not. Investing Daily’s goal is to help you build enough wealth to attain your American Dream.

Quote of the Day

“That’s still what the American Dream means: that with perseverance, with hard work, you can become something, that the classes won’t prevent you from becoming, that there’s a movement up that ladder with hard work.” — historian Doris Kearns Goodwin