Stocks Eke Out Slight Gains as Tax, Retail Worries Persist

The tax reform logjam in Congress, combined with fears that consumers won’t open their wallets this holiday season, reined in the markets on Monday.

Stocks opened in the red and struggled for direction throughout the day before ending slightly in the green. Monday’s choppy action reflected growing investor anxiety. The modest gains also masked bad breadth.

Investors have been looking forward to corporate tax cuts since President Trump took office. Regardless of which side you’re on, an honest assessment shows that prospects for tax reform are bleak.

President Trump on Monday waded into the GOP’s delicate negotiations over revamping the nation’s tax code. He insisted on even steeper tax cuts for wealthy Americans, complicating his party’s already difficult task. Trump also called for inserting into the tax bill an end to the Obamacare mandate, an idea that’s controversial.

The White House is now at odds with both the House and Senate versions of tax overhaul. The GOP has few votes to spare in the Senate.

For investors seeking clarity on federal tax policy, the news headlines are frustrating. But successful investors follow facts, not wishful thinking.

Here’s a fact: retail stocks appear to be oversold.

America’s “Goldilocks” economic climate (not too hot, not too cold) is manna for stocks and should boost the retail sector’s fortunes. Third-quarter earnings in hot sectors such as technology continue to surprise on the upside.

The leading sectors on Monday were health services and technology; transportation and communications led the losers.

U.S. economic growth has risen steadily and the country has recovered all the jobs lost from the Great Recession of 2008-2009. Since the depths of the recession, the unemployment rate has fallen by more than half. Joblessness hit 4.1% in October.

Mixed earnings results from key retailers have spooked investors ahead of the holiday shopping season. But this negative sentiment is overblown.

Strong employment growth, low gasoline prices, rising home prices, and reduced household debt have buoyed consumer spending throughout the year. This impetus should counterbalance disappointment over stalled tax cuts.

Consumer confidence rose in October to a 17-year high. Inflation has been kept in check. A strong U.S. dollar makes imports less expensive for U.S. consumers. Energy prices are rising only moderately.

The window on retail…

The investment herd is overreacting to mixed third-quarter earnings releases so far in the retail sector. They see the results as harbingers of doom.

And yet, the retail sector has a lot going for it. Many of the retail stocks that have taken a beating lately are undervalued in light of growth prospects.

Key operating results on the schedule this week include those from Wal-Mart Stores (NYSE: WMT), Home Depot (NYSE: HD), TJX Companies (NYSE: TJX), Target (NYSE: TGT), L Brands (NYSE: LB), Best Buy (NYSE: BBY), The Gap (NYSE: GPS), and Foot Locker (NYSE: FL).

Macy’s (NYSE: M) and JC Penny (NYSE: JCP) last week beat expectations for third-quarter earnings, but analysts remained unimpressed. JCP posted a less-than-estimated loss. Despite same-store sales growth, Kohl’s (NYSE: KSS) missed earnings expectations. The threat posed by e-commerce still looms large for all three.

Investors are turning pessimistic about retail, but a “Santa rally” isn’t out of the cards.

Consumer spending accounts for about two-thirds of U.S. gross domestic product, so keep positive economic indicators in mind when weighing the future direction of the markets.

About two-thirds of consumer spending occurs between now and the end of the year. The official kick-off is the frantic Friday after Thanksgiving.

With “Black Friday” looming on the calendar, the stars could be in alignment for healthy spending. Operating results this week will provide important clues as to shopper sentiment. In the meantime, let’s do the numbers.

Monday Market Wrap

  • DJIA +0.07% or +17.49 points, to close at 23,439.70
  • S&P 500 +0.10% or +2.54 points, to close at 2,584.84
  • Nasdaq +0.10% or +6.66 points, to close at 6,757.60

Monday’s Big Gainers

  • Mattel (NSDQ: MAT) +20.66%

Beleaguered toy maker soars on merger reports.

  •  GGP (NYSE: GGP) +8.29%

Mall owner receives buyout bid from its biggest shareholder, Brookfield Asset Management.

  • Hasbro (NSDQ: HAS) +5.88%

Toy maker offers to buy rival Mattel.

Monday’s Big Losers

  • General Electric (NYSE: GE) -7.17%

Struggling industrial colossus cuts dividend for second time since Great Depression.

  • Kohl’s (NYSE: KSS) -4.28%

Retailer’s 3Q earnings miss underscores analyst pessimism.

  • Macy’s (NYSE: M) -3.25%

Iconic retailer remains under pressure, despite 3Q earnings beat.

Letters to the Editor

“If the market is so dangerously overpriced as you state, why are we not going to cash for a while?” —Richard P. 

Richard, we’ve been recommending the following allocations (see pie chart). We’ve increased cash levels to 25%.

The market could keep rising in coming days, but high valuations leave a shrinking margin of safety.

The specific allocation percentages you choose depend on your investment profile, stage of life and appetite for risk.

No one fires a starter pistol to announce a correction. More than ever, stick to high-quality stocks that boast strengths that should hold them in good stead when the market stumbles.

Don’t exit the market altogether, but pare back exposure to growth stocks. Book profits in your biggest gainers. Make sure you’ve put ample money into hedges such as gold.

We’ve boosted cash levels, but don’t put your portfolio on automatic pilot. Perform regular reviews of your portfolio and place performance in the wider context of your long-term goals. We’re here to help you, every step of the way.

Got any questions or comments? Drop me a line:

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.