Flynn “Flips” and Wall Street Flips Out

Stock movements this week have mirrored the news out of Washington, DC. That’s a dumb way to invest.

On Thursday, stocks skyrocketed to new records after tax reform cleared hurdles in Congress. On Friday, as passage of tax reform looked even more assured, all three major indices nonetheless closed lower.

The culprit on Friday: Mike Flynn’s guilty plea. That spells trouble for Trump. But why dump shares of quality companies? Avoid knee-jerk investing. It’s a sure way to lose money. There’s no denying the president is in hot water. But that doesn’t change the fundamentals.

Reports surfaced Friday of Flynn’s plea deal with Special Counsel Robert Mueller. Flynn is pleading guilty to a single charge of lying to the FBI. Mueller is waiving the other more serious charges, such as conspiracy to commit kidnapping.

The logical conclusion: Flynn has “flipped.” Trump’s former national security advisor is turning over major evidence and testimony to be used against Trump. ABC News reported Friday that Flynn has testified that Trump told him to contact the Russians. That’s evidence of collusion. More shoes will drop.

But also on Friday, GOP Senate leaders announced that they had enough votes to pass tax reform. Wall Street has been rooting all year for this bill. Tax hopes cushioned the initial blow from Flynn and by late afternoon stocks regained some lost ground.

How should you view Friday’s roller-coaster? Consider this wisdom from Warren Buffett:

“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.”

Former FBI Director Robert Mueller is a tough adversary. Trump’s Christmas isn’t likely to be merry. But this quarter, here’s the likely scenario: Consumers will spend freely. Corporate profits will increase. The economy will grow. OPEC’s production curbs will stick.

OPEC on Thursday extended its production cut to the end of 2018. Oil prices spiked Friday, reaching 2½-year highs. West Texas Intermediate rose 88 cents to close at $58.28 per barrel. Brent North Sea crude rose $1.00 to close at $63.63/bbl. The return of balance to energy markets is beneficial for all investors.

For the third quarter, the blended earnings growth rate for the S&P 500 was 6.3%. Eight sectors reported earnings growth in the quarter, led by energy. Estimates for the fourth quarter are optimistic.

Robust Black Friday sales and high consumer confidence indicate that we face a “Santa Claus” rally. Major automakers on Friday offered positive estimates for vehicle sales in December.

On Friday, the Institute for Supply Management reported that its manufacturing index slipped to a reading of 58.2% last month from October’s 58.7%. That’s only a slight decline and still strong.

Here’s some advice: avoid cable news this weekend. Putter in your yard. Play with your kids. But don’t make investment decisions based on screaming headlines.

Yes, this stock market is overvalued. But you should have implemented your “crash protection” by now. If you haven’t, below are my recommended allocations.

These are just general guidelines. Precise percentages depend on your profile. Hedges should include precious metals, such as gold.

Shun overpriced darlings hyped on CNBC. Stick to quality and value. With so few bargains left, proactive stock picking is all the more important.

Trying to time the correction is a fool’s game. No one shoots a flare to announce a recession or bear market. Economic indicators are positive. This bull market might have more room to run.

The stock market this year has taken one blow after another. Yet it keeps staggering forward. The Trump-Russia investigation adds uncertainty. And Wall Street hates uncertainty. But the White House has limited influence over stocks. Our free-market economy can run on its own, without meddling from politicians.

To quote another wise man, Kahlil Gibran: “The dogs bark, but the caravan goes on.”

Friday Market Wrap

  • DJIA: -0.17% or -40.76 points to close at 24,231.59
  • S&P 500: -0.20% or -5.36 points to close at 2,642.22
  • Nasdaq: -0.38% or -26.39 points to close at 6,847.59

Friday’s Big Gainers

  • Apache (NYSE: APA) +5.71%

OPEC deal lifts energy producer.

  • Mylan (NSDQ: MYL) +4.35%

FDA approves biotech’s new biosimilar.

  • Halliburton (NYSE: HAL) +3.06%

Oilfield services firm also benefits from OPEC deal.

Friday’s Big Losers

  • Ulta Beauty (NSDQ: ULTA) -4.12%

Beauty retailer’s margins under pressure.

  • Qorvo (NSDQ: QRVO) -3.09%

Mobile tech provider issues weak quarterly guidance.

  • Broadcom (NSDQ: AVGO) -2.30%

Chip maker’s merger with rival Qualcomm (NSDQ: QCOM) delayed.

Letters to the Editor

The windfall for banks

“Bank stocks are outperforming this week. Why the rise?” — Kenneth R.

Traders are reacting to strong earnings reports, a likely interest rate hike in December, economic recovery, and rising energy prices. Higher rates make it easier for banks to generate profits. Higher oil and gas prices ease the energy sector debt on bank balance sheets.

Also boosting banks are improved chances of tax reform in the Senate. The proposed cut in the corporate tax rate would be a boon for banks. The financial services sector would benefit more than others because it typically has fewer deductions.

How much do you think political turmoil really affects your portfolio? Please weigh in. You can reach me at:

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

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