The Big Picture
“…But the last third of a great bull market is typically a blow-off, whereas the mania runs wild and prices go parabolic.” -Paul Tudor Jones
Now let me begin by stating the above quote is not meant to cause a stir. Stay with me here. In financial markets, when we refer to a market or security that is “going parabolic”, we are referring to a price that is increasing at an increasing rate. Are we seeing this in U.S. markets? I’ll leave to you to judge.
The Dow Jones Industrial Average (DJIA) rose 1000 points in 7 trading sessions (Bloomberg). This was the fastest 1000 point rise ever! The DJIA is not the only index on the rise. Is there a reason to be concerned with this type of market action? Isn’t a rising market a good thing? There are a number of factors we could explore to consider the answer. First step, is the rise justified?
Have a Plan and a Process!
From the Trenches
“I am in favor of cutting taxes under any circumstances for any excuse, for any reason, whenever possible.” -Milton Friedman
When the market environment changes, it is important for us to have an idea why. This is part of our ongoing monitoring of economic and market conditions. Sometimes the cause for change is obvious, other times more obscure. Cause and effect is never fully assured, but at times much clearer than others. This particular occurrence I believe the cause is more obvious.
The economy likes tax cuts. The market likes tax cuts. Who doesn’t like a tax cut?
Tax cuts go straight to the bottom line in figuring earnings. And as the number paid to Uncle Sam declines, what is left over increases. As earnings increase, the current multiple on the market decreases. Long and short, this makes stocks more attractive. It is but one of many factors, but a fairly significant and straightforward point. The end result is more money to the company.
There are arguments in the theory of taxation as there are in most aspects of the economy. Do tax cuts stimulate growth? We shall see. History is mixed on this. Either way, the market appears to be viewing this as a positive.
Bottom line: From a valuation standpoint, tax cuts benefit companies by increasing earnings. Higher earnings may justify higher prices.
“The difference between death and taxes is death doesn’t get worse every time Congress meets.” -Will Rogers
Going back to the beginning quote. As stated, I am not attempting to sound a warning horn. Simply pointing out that the market rally we have witnessed recently as well as over the past year is exceptional. Some points:
- 2017 witnessed the lowest volatility since 1964. (FT)
- The DJIA has not seen a pullback of 5% since June of 2016. (Bloomberg)
- The relative strength of the DJIA is at a level not seen since 2013.*(StockCharts)
They call it a melt-up.
What may we take away with this knowledge? The answer generally depends upon your individual perspective and psychology than anything else. That said, the market rally has clearly gained strength over the past months.We can always find reasons to refute or pontificate on why it should or shouldn’t be so. In the words of legendary trend-follower Ed Seykota:
“It can be very expensive convincing the market you are right!”
Bottom Line: We don’t recommend fighting a bull. We also don’t recommend becoming too complacent either. If you have questions and concerns on the current market you know where to find me.
*Relative strength is a momentum indicator that compares the magnitude of gains and losses over a specified time period to measure speed and changes of price movements. Data collected from weekly observations.