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WALL STREET INSIGHT

Bull market likely to get back on track this week

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US stocks ticked down last week, and the Dow Jones Industrial Average snapped an eight-week winning streak amid fears that the Republican tax cut plan could founder on the rocks of political discord.

The bull market is likely to get back on track this week, as long as the tax plan and retail earnings do so, too.

The hammering that President Donald Trump's Republican party took in state elections in Virginia and elsewhere was interpreted by some political analysts as weakening Mr Trump's hand on taxes and other policy. Another unwelcome distraction: the sexual-abuse scandal that has engulfed Hollywood spread to Washington DC as Republican Alabama Senate nominee Roy Moore was accused of sexual impropriety with a minor.

Mr Trump's profile on the global stage was also diminished after his "America First" address to the Apec conference was followed by Chinese President Xi Jinping taking up the mantle of international trade.

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Still, sex scandals, statesmanship and state elections, of course, have little direct bearing on the stock market. The "Trump bump" that began in the immediate wake of his election has largely stuck, so far.

"Although no one at the time would have believed it, the 12 months since Election Day have been among the least volatile ever for equity markets; not to mention the solid 21 per cent gain the S&P 500 Index racked up along the way that has the bulls smiling," said Ryan Detrick, senior investment strategist with brokerage LPL Financial, in a note to clients.

The surge in shares of banks, tech companies, raw-materials producers and industrial companies that constitutes the Trump bump will likely resume should the Republican Congress succeed in passing tax legislation, with or without Mr Trump's support.

Signs of legislative progress are mixed. The House of Representatives and the Senate have each moved tax-cut bills onto the docket. The plan was that each chamber would pass its own version of the bill and the two versions would be reconciled for a final package.

But the stock market recoiled when the Senate version appeared irreconcilable with the House version.

Where the House bill does away with long-standing provisions such as estate taxes and mortgage-interest deductions, the Senate bill leaves much of the current tax framework more or less intact (although it does do away with some deductions more popular in the House).

While both bills call for corporate tax rates to be slashed from 35 per cent to 20 per cent, the House version would make the changes immediately while the Senate version would delay the cut until 2019.

In the past, tax cuts have led to short-term boosts in economic growth. Already, GDP growth has rebounded to around the optimum level of 3 per cent.

One reason that growth is accelerating, according to economists at brokerage Morgan Stanley, is the renewed willingness of corporations to reinvest in machinery and tech systems, which is increasing productivity. Others are less sanguine about the economic outlook.

State of transition

"With job growth slowing, with the personal savings rate down, and with consumer confidence likely peaking, it is very probable the economy will slow next year," warned Brad McMillan, chief investment officer for Commonwealth Financial Network.

"What will be the effect of slowing earnings growth combined with lower confidence? Even though this is very probable, and predictable, chances are that - at some point - it will hit the markets as a surprise."

Many industries are already in a painful state of transition.

AT&T's proposed US$80 billion acquisition of Time Warner is less a bold bet on a new business strategy than an acknowledgement that old-line media and telecom companies had to make radical changes to fend off challenges from Internet streaming services. Shares of Time Warner briefly plunged last week after reports that the Department of Justice demanded the sale of the satellite-television unit or the unit that produces CNN before it would approve the deal.

Earnings from the retail sector are a reminder of the lethal threat posed by Amazon.com. JC Penney shares surged on Friday as it managed to eke out same-store sales growth for the latest quarter. But Penney's shares remain more than 60 per cent down on the year as the chain-store struggles to clear shelves without slashing prices. This week, Amazon's main rivals in the physical world, Walmart Stores and Target, will reveal whether recent efforts to compete with the online threat are bearing fruit.

Even some of the darlings in the tech industry are coming under pressure. Shares of electric car maker Tesla have given back some of their majestic gains for the year. Shares of Snapchat parent Snap fell last week as the youth-oriented social network reported sluggish user growth.

In the energy industry, tensions between Saudi Arabia and Iran have driven oil prices to a two-year high, near the US$60-per-barrel level. Widening hostilities between Iran and Saudi Arabia are a growing risk for not just the oil market, but the stock market, too.

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