Robert Tucker with a Word from Jeff

Midsummer has come and the markets still rage. A now-standard explanation for this is the expectation that eventual tax cuts will drive enough additional net profit to corporations that current lofty valuations will seem cheaper once this happens. This is a very reasonable argument, even though post-tax-cut stock valuations still won’t be at bargain levels, as are many non-US markets. The fly in this Goldilock’s ointment, of course, is that the “once” should be “if and when” tax cuts happen. The Trump administration is enmired in ever-deepening muck, the Republican-controlled Congress is factionated beyond belief and can’t even agree on the core tenant of health care reform, and true tax reform – as opposed to feel-good tax cuts and to the devil with soaring deficits – is a complexity that would vex even Franklin and Jefferson. I believe tax reform will happen – it really has to – but not in the near term, and I mean not for at least a year or two at best.
Also weighing on US stocks’ frothy valuations is the now-confirmed worldwide trend of rising interest rates. As this gains momentum, bond prices will drop (watch out bondholders!) and yields will rise. Besides affecting stock corporations’ borrowing rates (and profitability), consumer spending and demand, and other economic factors, this will change the investment landscape in one major way. As bond prices drop and yields rise, income-hungry investors will have an alternative to dividend stocks, which are likely to be perceived as riskier and pricier. If they sell stocks in a major way – and there are some indications this has already begun – selling pressure will inevitably dent stock prices.

But enough gloom and doom. The summer is here, and the sun may shine forever! Those of you who have read me for a while know I am generally quite bullish and optimistic, and I still am, just not on US stocks in the near term. Camarda still expects a correction here, before resumed growth. Please don’t be surprise or disturbed by it if it comes, and try to keep your eye on next summer’s diversions.

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