
Any thoughts that 2018 might start with a pause in the bull market were quickly dispelled in the first week of the year. A “buy the rumor, sell the news” view on tax reform has shaken out to be more aptly described as buy the rumor and buy the news.
In our opinion, the credit goes to the dramatic reduction in the corporate tax rate — from 35% to 21%, beginning in 2018.
On January 1, analysts were forecasting a 12.2% rise in Q1 2018 S&P 500 profits (Thomson Reuters) — pretty impressive. By January 31, analysts had sharply raised the Q1 estimate by a full five percentage points to 17.2%.
There’s only one word to describe the dizzying upward surge in estimates: astounding. And it’s not simply in Q1 of 2018; analysts have sharply boosted profit outlooks for the other three quarters of this year.
As we’ve mentioned in the past, earnings and expectations of earnings play a big role in the stock market price equation. The runup we’ve witnessed, in our view, is due to investors pricing in a much rosier profit outlook.
Warren Buffett, who called the cut in the corporate tax rate a “big deal…a huge, huge reduction,” summed it up this way in a CNBC interview in the middle of last month:
“You had this major change in the silent stockholder in American business, who has been content with 35%…and now instead of getting a 35% interest in the earnings (he noted foreign earnings from U.S. firms are more complicated), they get 21% and that makes the remaining stock more valuable.”
It’s a unique and colorful way to describe the new tax regime.
By month’s end, a modest bout of volatility re-entered the landscape, as investors took note of an upward creep in Treasury bond yields. It’s a reminder that stocks don’t rise in a straight line.
Time to time?
Let’s end this month’s newsletter with a recent comment by Burton Malkiel.
He’s not a household name like Buffett, but he is the author of A Random Walk Down Wall Street, a well known and well-respected book published in 1973.
“I think one of the cardinal rules of investing is don’t try to time the market. And the reason is that you’ll never get it right. I’ve been around this business for 50 years and I’ve never known anyone who could time the market and I’ve never known anyone who knows anyone who could time the market. You can’t do it. It’s very dangerous.”
Table 1: Key Index Returns
Source: Wall Street Journal, MSCI.com, MarketWatch, Morningstar
MTD returns: Dec 29, 2017 – Jan. 31, 2018, YTD returns: Dec 29, 2017 – Jan. 31, 2018
*Annualized, **in U.S. dollars
Continue Reading
Other articles filed under Market Commentary
The Morgan Report Q3 2023 Review: Breaking Bad… Behavior
October 12, 2023 - Quick Quiz: What do you think I feel is the most important role as an advisor with my clients? Financial Planning Behavioral Coaching Investment Management Resource Due Diligence I’ll answer below but let me provide some insights first. A study...
Continue Reading
The Morgan Report Q2 2023 Review: Sustained Motivation
July 13, 2023 - Here are two observations I have on life: Motivation does not sustain itself. Discipline and continued effort is a challenge. Staying motivated in one specific area of your life is a very challenging proposition. In reality, we are multitaskers juggling...
Continue Reading
The Morgan Report Q1 2023 Review: Trying To Be Super Awesome Is Not Sustainable
April 12, 2023 - When investing, it would be awesome to be super awesome all the time. Unfortunately, unlike the fictional world of Lake Wobegon or The Incredibles, reality is not very accommodating to over confident fantasies of perpetual awesomeness. As a father of...
Continue Reading
The Morgan Report Q4 2022 Review: The Year of Living Dangerously
January 11, 2023 - Danger can be defined as “something or someone that may harm you.” My role working with families as a financial advisor is to help them try to avoid dangers involved in our financial world which I believe is interestingly influenced...
Continue Reading
The Morgan Report Q3 2022 Review: The Best Is Yet To Come
October 17, 2022 - Recently the International Monetary Fund’s (IMF) Chief Economist Pierre-Olivier Gourinchas, as a supplement to the IMF’s World Economic Outlook Report October 2022 stated in his blog that “Overall, this year’s shocks will re-open economic wounds that were only partially healed...
Continue Reading
- The Morgan Report Q2 2022 Review: Chaos – The True Norm
- The Morgan Report Q4 2022 Review: The Year of Living Dangerously