The Long Awaited Tax Plan

October 2, 2017

Last week, Wall Street celebrated the Trump administration’s tax plan with the prospects for lower corporate taxes and less tax on repatriating profits back to the US. Major indices closed the week at new all time highs: the DJIA gained 0.2%, the S&P 500 was up 0.7% and the NASDAQ advanced 1.1% for the week. The recent increase in the dollar sent the MSCI EAFE index down 0.3%. However, small US stocks cheered the dollar rally, with the Russell 2000 index gaining 2.8% for the week — a record high.

The month of September historically has been the worst month of the year for the stock market, yet the DJIA was up 2.1%, the S&P 1.9% and the NASDAQ 1%. For the third quarter, the NASDAQ rose 5.8%, with its fifth straight positive quarter, the DJIA surged 4.8% while the S&P gained 4%.

The Feds hawkish comments and better-than-expected GDP numbers caused Treasury yields to continue to rise with the 10yr US Treasury settling at 2.34%.

US crude oil prices rose 2% to $51.67 a barrel which is a five month high as oil stocks responded nicely to the news. New home sales fell to an eight month low in August and pending home sales came in at close to its two year low. Without question, the devastation of the hurricanes is affecting our economic outlook.

This week the Institute for Supply Management index (PMI) will be reported on Monday, vehicle sales will come Tuesday and on Friday, the labor Department will announce its September employment report.

We are pleased and yet concerned about the second longest “Bull Market” in history. The forward price to earnings (P/E) ratio for the S&P 500 is 19 times with earning estimates of $131.38, while historically the long-term average P/E ratio is closer to 15 times. In addition, a marginal decline of non-financial companies buying back their own stock could raise some alarm. These larger US companies are in pretty solid financial shape with $2.3 trillion in liquidity. We hope more will begin to spend on infrastructure expansion and accretive mergers and acquisitions.

“Love is the most important thing in the world, but baseball is pretty good, too.” –Yogi Berra