Another day, Another historic Stock Market milestone
The stock market has been going up like a rocket, setting new all-time highs as a weekly, and sometimes daily, occurrence. What is the driver for this, and what would cause it to stop? One of the drivers could be the passage of tax reform. Since the top tax rate for all companies just went from 35% down to 21%, there was just enacted a 14% additional profit for all companies in that tax bracket. In addition, because all companies’ stock prices are based on earnings and earnings potential, a 10% increase in profit would mean a 10% increase in earnings. And if companies’ valuations are (typically) 10-times earnings, this would mean an increase of 100% (the price of the stock should double). Therefore, all companies should be (theoretically) worth more.
What could cause this euphoria in stocks to subside? What could cause the momentum in stock prices that is driving them spiraling up to higher and higher values to suddenly change direction? Any number of possibilities. The landscape is ripe with risks. One of those risks has to do with rockets, as in the missiles that North Korea is repeatedly launching in defiance of worldwide pressure. Another risk is the economy. While the economy has been performing very well the last two quarters (GDP over 3%), that number could be a false indicator, driven by temporary large expenditures to recover from the recent domestic weather-related disasters. Another risk is political. The government could shut down as early as January 20th, if Congress doesn’t agree on a spending bill. The bill must be passed by midnight on Friday night, or government agencies will close, government employees will be furloughed, and military personnel and veterans will not be paid.
What does this mean for most investors? If you are sitting on the sidelines, this is no time to invest new money into the Stock Market. If you are heavily invested, be mindful of what is happening, and be prepared to exit the market if things start to go south. Take a lesson from the recent investors in the crypto-currency mania – you don’t want to be kicking yourself for not taking profits, or to regret getting in at the peak of a mania as you watch the losses pile up…
