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Santa Comes Early to Wall Street; Dow Ends at Record

Friday’s flip-out about Flynn’s “flip” is finished. Santa’s got a brand new bag and it’s full of tax goodies. The Dow Jones Industrial Average broke into record territory on Monday, in the wake of the Senate’s approval of tax overhaul.

Gains were sharply higher earlier in the day. By the closing bell, they retreated as leading tech stocks tumbled. The S&P 500 and Nasdaq closed in the red.

The House and Senate tax plans still need to be reconciled, but the upshot is clear: corporate coffers are poised to receive massive infusions of cash. Wall Street has been waiting for this moment the way a little kid waits for Saint Nick.

The centerpiece of tax overhaul is a big cut in corporate taxes. Both the House and Senate bills call for slashing the corporate tax rate to 20% from 35%.

The GOP’s tax overhaul is controversial. Deductions popular with the middle class would be eliminated, which has provoked an outcry from Democrats. But in the wee hours Saturday, the package squeaked by the Senate 51-49.

Financial services led the rally. Banks take advantage of fewer deductions than other corporations; a reduction in the tax rate would be a bonanza for banks. What’s more, if tax cuts stimulate growth as the GOP promises, banks would benefit with loan portfolio expansion.

Retail also got a boost. Traders expect a prosperous holiday season. Consumer confidence is high and spending already strong.

Both House and Senate versions of tax overhaul would offer a break for companies to repatriate foreign profits. That would be a boon for technology companies with billions of dollars parked overseas. But large tech stocks sank on Monday.

Tech stocks are overheated; investors rotated out of the sector into financial services. The tech-heavy Nasdaq has risen about 30% this year. On Monday, investors cashed out.

The year in review…

As a new year approaches, let’s take a look back.

A divided electorate. “Populist” appeals to angry blue-collar workers. Racial tensions. Urban riots. Terrorist killings. Worsening relations with Russia. An unpopular Republican standard-bearer. Senseless mass shootings. U.S. troops fighting guerrillas in foreign lands. Increasing incivility. Coarsening public discourse.

Yep, 1968 was a brutal year.

And yet for stockholders, life was sweet. By 1968, the stock market had been rising (with a few minor hiccups) for two decades. The American economy was at its peak. The “Nifty Fifty” reigned supreme. When Richard Nixon entered the White House, prosperity seemed endless.

Then came the 1973-74 bear market. Stocks got crushed. Between January 1973 and December 1974, the Dow plunged by more than 45%.

Let that number sink in. Could you afford to lose 45% of your portfolio’s value?

Today’s bull market is more than eight years old. You should prepare for a market correction. A reader asks: Why all this hand-wringing? Why not just enjoy the good times?”

My answer starts with history.

The business cycle is ending. The global economy falls into recession every eight years; the last recession ended in 2009. Stocks are on fire, but the laws of economics haven’t been repealed.

What triggers recessions? Higher interest rates. Central banks start raising rates to control inflation. They rarely get it just right. The Federal Reserve usually hikes rates too far, too fast.

The Federal Reserve is unwinding its vast pile of assets. The Fed raised rates three times in 2017; it signaled that it will raise rates three more times in 2018.

As 2018 looms on the calendar, investors are feeling cocky. Tax cuts are within reach. Global growth is healthy. U.S. indicators are strong.

Which brings me to valuations. (Stifle that yawn!) I know, pundits have beaten that dead horse to a bloody pulp. But I’d be remiss if I didn’t point out that valuations are dangerously high. The stock market is more expensive now than in 1929 and more expensive than in 2007. Those years turned out to be ugly.

The end of the business cycle, rising rates, and high valuations. A risky combination. As the Fed tightens, indebted companies will default. The downward spiral will begin.

I’m not trying to play Scrooge. Go ahead and raise a glass to Monday’s rally. Be grateful for a prosperous 2017. Enjoy your gains. But remember the ghosts of bull markets past.

Monday Market Wrap

  • DJIA: +0.24% or +58.46 points to close at 24,290.05
  • S&P 500: -0.11% or -2.78 points to close at 2,639.44
  • Nasdaq: -1.05% or -72.22 points to close at 6,775.37

Monday’s Big Gainers

  • General Cable (NYSE: BGC) +35.40%

Fiber optic cable maker target of takeover bid.

  • Blue Apron Holdings (NYSE: APRN) +16.41%

Meal kit service installs new CEO.

  • Cameco (NYSE: CCJ) +12.97%

Uranium miner lifted by soaring prices

Monday’s Big Losers

  • CVS Health (NYSE: CVS) -4.74%

Investors react negatively to CVS’ plan to buy insurer Aetna (NYSE: AET).

  • GNC Holdings (NYSE: GNC) -2.60%

Struggling wellness chain hires outside advisor for strategic overhaul.

  • Oracle (NYSE: ORCL) -2.44%

Tech decline weighs on software stalwart.

Letters to the Editor

“South Korea has been in the news, as North Korea tests nuclear missiles. So it got me thinking like a contrarian. Is South Korea a smart play?” — Floyd B.

South Korea is one of the world’s success stories. After the destruction of World War II and the Korean War, the nation rose from austere dictatorship to prosperous democracy. But when South Korea makes the news, it’s usually because of a crisis. Investors are being shortsighted.

South Korea’s export economy is weighted toward technology. That’s a recipe for growth. But the country’s equities are cheap. Instead of individual stocks, pick an exchange-traded fund that’s a proxy for the economy. That’s a safer and easier way to gain exposure.

Got any contrarian ideas to share? Drop me a line: mailbag@investingdaily.com

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

 


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