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Fear the Grim Taper: Stocks Close Mixed in Choppy Trading

By John Persinos on February 1, 2018

Mr. Market is a manic-depressive. He must have been off his Lithium today. We saw a lot of wild mood swings.

The Federal Reserve’s unexpectedly hawkish tone weighed on markets Thursday. Stocks were sharply down in the morning. They broke into positive territory in the afternoon. By the end of the volatile session, the S&P 500 and Nasdaq were in the red. The Dow closed slightly higher.

Lackluster operating results played a role. Notably, chipmaker Qualcomm (NSDQ: QCOM) issued weak guidance.

But most of today’s anxiety came courtesy of the Fed. At the end of its meeting yesterday, the central bank flagged inflation as a threat. The Fed noted that it no longer expects price growth to stay below 2%.

Fed officials indicated “further gradual” interest rate hikes. They hinted that the $1.5 trillion tax cut could overheat the economy. Wall Street didn’t like what it heard. In Fed-speak, the word “further” was ominous.

Wall Street is dismayed by the DC swamp. Investors realize that President Trump’s agenda has stalled. Sure, tax overhaul was a big legislative win. But this year, wins will be elusive.

Trump’s State of the Union plea for bipartisanship fell on deaf ears. Republicans and Democrats are more divided than ever. The Russia investigation keeps the White House off balance. Then there’s the matter of excessive equity valuations.

Bubble, bubble, toil and trouble…

Analysts are sounding the alarm about an asset bubble. Goldman Sachs (NYSE: GS) this week warned that the bubble is about to pop.

If bearish predictions come to pass, keep this truism in mind: The last thing you want to do is bail out of a bear market. You’ll lock in losses.

You’re better off waiting out a downturn. Don’t panic like everyone else. Distressed assets with improving fundamentals often bounce back. The average correction is 13% over four months and takes only four months to recover.

Another truism: If the press tells you that a company is doomed… well, perhaps the opposite is true.

Consider the story of Apple (NSDQ: AAPL). In 1985, Apple forced out Steve Jobs. He was a genius. He was a celebrity. He had revolutionized technology. But Apple’s board said: Hit the bricks, pal.

Jobs had lost a battle with the new CEO, John Sculley, former head of PepsiCo (NYSE: PEP). Sculley was hired to bring “professionalism” to free-spirited Apple.

Sculley could sell sugary drinks. He couldn’t sell computers. Apple’s sales continued to slump. New products flopped. Morale plummeted. The press wrote Apple’s obituary. Investors dumped the stock.

In 1997, Sculley was forced out and Jobs was lured back. When Jobs returned, cash-starved Apple was a mere 90 days from bankruptcy.

You know the rest of the story. If you had invested in this “distressed” stock in 1985, you would be sitting on huge gains. Apple is now the most valuable company in the world.

Apple is slated to report first-quarter earnings after the bell today. Analysts are worried about iPhone X demand; the gadget is pricey. Sales of lesser versions, the 8 and 8 Plus, also seem vulnerable. Taiwan Semiconductor Manufacturing (NYSE: TSM) said it expects lower demand for its iPhone chips.

The other issue with Apple is taxes. The firm said it would repatriate $400 billion stashed overseas. The GOP tax bill ensures lower domestic taxation.

Apple estimates it will have to pay $38 billion in tax charges. This bothers some analysts. But the Cupertino giant has $36.5 billion in deferred tax liabilities. That would cover the tax charge without affecting earnings.

Apple remains a top-notch innovator. Investors who bet against the company incurred an enormous opportunity cost. The lesson? Don’t let temporary setbacks throw you off course.

For the markets, today was a setback. Let’s do the numbers.

Thursday Market Wrap

  • DJIA: +0.14% or +37.32 points to close at 26,186.71
  • S&P 500: -0.06% or -1.83 points to close at 2,821.98
  • Nasdaq: -0.35% or -25.62 points to close at 7,385.86

Thursday’s Big Gainers

Mobile tech firm beats on earnings.

E-commerce platform dumps PayPal.

Driver-less car demand fuels chip maker’s growth.

Thursday’s Big Decliners

Parent jettisons payment service.

Investors pocket gains in high-flying stock.

Delivery firm’s earnings disappoint.

Letters to the Editor

“How will the new tax bill affect the middle class?” — Doug J.

Tax overhaul reduces the corporate tax rate to a flat 21% from the highest 35% rate. That’s the main feature. Lowering the corporate rate will boost bottom lines. Shareholders will benefit.

But someone has to pay for those tax cuts. The law reduces or eliminates many itemized deductions.

The deduction for state and local income taxes, property taxes, and real estate taxes is limited to $10,000. The mortgage interest deduction is limited to $750,000. Deductions enjoyed by the self-employed were gutted. The upshot: Many middle-class Americans will see higher taxes.

April 17 is looming. Questions about taxes? Give me a shout:

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


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