Recall that in Thursday’s Afternoon Edition, we told you about the catalyst for the latest bull run. It came courtesy of President Trump, who said an announcement that would be “phenomenal in terms of tax” will arrive within the next three weeks.
The possibility of tax reform, particularly corporate tax reform, is something we’ve been telling readers is key to sustaining and building on the post-election gains.
Now, it looks like that may actually happen.
Of course, there’s a long way to go from “phenomenal” announcements to an actual rewrite of the U.S. tax code. Still, the episode illustrates how this market is trading off political expectations, and not off more-concrete metrics like earnings.
In some ways, that’s unfortunate, because earnings in Q4 have themselves been, well … phenomenal.
A recent Bloomberg article detailed just how strong Q4 earnings have been:
U.S. investors are being treated to one of the best sets of corporate results since the financial crisis. (But) you wouldn’t know it from the stock market.
It’s the first quarter in eight that S&P 500 Index profits will rise fast enough to pronounce an end to the earnings recession.
Not only is income up more than 4 percent, so are sales, rising at the second-fastest clip since 2012.
But why wouldn’t we know this from the stock market?
Well, per the Bloomberg piece:
Data from Bank of America Corp. show that companies whose top- and bottom-line results beat analyst predictions gained less than 1 percent the next day, less than half the average since 2000.
This tells us that, despite strong earnings, markets haven’t really cared all that much. It also tells us that traders seem to largely be ignoring traditional fundamentals like corporate bottom lines.
Instead, all eyes are on Washington, and the future of fiscal, regulatory and tax policy.
Hey, I get it. The potential for real tax reform will trump (get used to that pun) bottom-line results … at least in the short term.
Yet when the political buzz dies down (and it always does), the market will return to the days when quarterly corporate results actually meant something.
Yes, this is a bit of an exaggeration, as traders do still react to big earnings beats and big earnings misses. Still, there’s no supplanting political expectations as the No. 1 driver of stock prices right now.
The good news here is that, despite all the noise in Washington that’s affecting markets, the basic premise to keep in mind is quite simple:You may not like it, and you don’t have to like it. You do, however, have to respect it if you want to successfully navigate this market.
Whatever drives the Trump/Republican pro-growth, lower-tax, anti-regulation agenda forward will drive markets higher.
Conversely, whatever stalls or thwarts implementation of that agenda will drive markets lower.
Welcome to the new world order.
The SPDR Dow Jones Industrial Average ETF (NYSE:DIA) closed at $202.74 on Friday, up $1.02 (+0.51%). Year-to-date, DIA has gained 2.65%, versus a 3.57% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Uncommon Wisdom Daily.