Market Commentary, 01/19/18

Just thirteen business days into the New Year, the S&P 500 is up almost 5% while the Dow and the Nasdaq are up slightly over 5%. The Dow broke 25,000 on January 4, and just seven business days later (Wednesday of this week), it rose 323 points, the largest one-day gain in fourteen months, to close above 26,000 for the first time.

There are at least three “drivers” of recent market performance. First, a primary driver is the reduction in business tax rates (per legislation that became law on December 22) and in a year or two we’ll likely see that this reduction in corporate tax rates was even more significant and powerful than it now appears. Second, in a few days companies will start issuing earnings reports and it appears that Q4, 2017 earnings for S&P 500 companies are expected to be 12% higher than earnings reported for Q4, 2016. And third, foundational to the market’s performance in the past fourteen months is the White House. Yesterday President Trump received stellar marks regarding the impact of his policies on the stock market, economic growth and job creation in a study conducted by the Wall Street Journal. Of 68 economists surveyed for the study, 90%, 76% and 63% said that the president has had a “strongly positive” or “somewhat positive” impact on the stock market, GDP growth and job creation, respectively.

U.S. stock markets market closed slightly down yesterday and today, probably because of the possibility of a so-called “government shutdown” this weekend if a spending agreement is not passed by one minute after midnight tonight. (I say, “so-called” because, as a practical matter, not much shuts down.)

Despite recent market strength and the logic behind it, some claim the market is on the verge of a significant correction if not a downright fall and in fact, the Bear rationale has certain merit. After an eight-year Bull market the market’s long-term valuation has reached the upper end of its normal range and rip-roaring, double-digit returns for multiple years seems unlikely.

However, in the months-to-years timeframe – the timeframe which sees cyclical Bull advances and Bear declines – indicators are that we’re still in Cyclical Bull territory. Further, shorter-term (weeks to months) indicators turned positive on December 27th and separately, intermediate-term quarterly trend indicators – based on domestic and international stock trend status at the start of each quarter – was positive entering January, indicating positive prospects for equities in the first quarter of 2018.

So … while we remain bullish on the market in the near-term, we have implemented certain risk management strategies in case the market turns quickly. Specifically, this week we sold securities that had either reached our price objective or have underperformed for at least a year. More importantly, since most of our TD Ameritrade accounts are up from 15% to 30% in the past year, we’ve installed trailing, 10% STOP-LOSS orders for about $40 million in securities held in these accounts.

RECOMMENDATION: All things considered, I recommend that you reallocate your 401k and other retirement accounts not managed by CFA such that 20% of those accounts is in cash, Money Market funds or Stable Value funds. And each time (if and when) the Dow passes through another thousand level (e.g., 27,000, 28,000, etc.), increase cash by another 10% of the account value (e.g., at Dow 27,000 go to 30% cash; at Dow 28,000 go to 40% cash, etc.). For a more detailed recommendation, email us a list of your 401k options.

Wayne Copelin, CFP®
President, Copelin Financial Advisors, Inc.
514 Brooks Street
Sugar Land, TX 77478
Phone (281) 240-2902
Fax: (281) 240-2856
sugarlandfinancialadvisors.com

Securities offered through ProEquities, Inc., a Registered Broker-Dealer and Member FINRA & SIPC Advisory Services offered through Harvest Investment Services, LLC., a Registered Investment Advisor Copelin Financial Advisors, Inc and Harvest Investment Services, LLC are independent of ProEquities, Inc.