November 28, 2017

Well then, Party On!

On Tuesday, the S&P 500 was up 1.0% and the Down Jones Industrial Average was up an attention-grabbing 255 points or 1.1%. The jump was fueled by optimism that the corporate income tax reduction bill is closer to getting passed. A version of the bill passed a Committee vote and will be debated I believe tomorrow by the full Senate.

I wonder though how many times the market can rise on the same news?

As an investor I suppose I should cheer for a corporate income tax cut. But I look at the fact that the after-tax earnings on the S&P 500 are up 20% in the last year on a GAAP basis and 17% on an operating basis – to, by far, new record highs. And I look at investors happily paying 24 times trailing GAAP after-tax earnings for the S&P 500 and I wonder how that indicates that American businesses are suffering under the current 35% income tax.

Sorry, but I have never been in the “any-tax-cut-is-a-good-tax-cut” camp.

If the tax cuts do come they will also benefit those many Canadian companies that earn a lot of their revenues in the U.S. These include Couche-Tard, Stantec, CN Rail, Fortis Inc., Royal Bank, CRH Medical, and Constellation Software as well as many companies not our list. CN rail in particular would likely get a large one-time gain due to a lower liability for its deferred income taxes.

Meanwhile as markets cheered the progress on the tax cut legislation, the North Korean Intercontinental Ballistic Missile test was ignored as was a looming possibility of a U.S. government “shut-down” that could apparently happen on December 8th if certain spending bills are not agreed to by then.

So, it is party on as investors keep dancing as the music keeps playing or something like that. The CEO of Citigroup in August 2007 prior to the financial crisis, in the midst of warnings about loose lending, famously said that one had to keep dancing as long as the music played even as he admitted that the then party would end at some point. It soon did.

Now, 2017 is not 2007 and there is nothing equivalent to the sub-prime lending crisis threatening the U.S. markets at this time. But there is the prospect of higher interest rates which will be a negative at some point. There is the potential for increased tensions with North Korea. There is the fact that U.S. protectionist policies could harm the U.S. economy at some point. Still, U.S. markets could certainly keep going up. And as Buffett would say, the S&P 500 is almost certain to be higher a couple of decades from now and probably substantially higher. But even so, there will be a decline in the market at some point. When that happens investors with some cash on hand may find some bargains.

In today’s market most of the U.S. stocks on our list were up.

Toronto missed the party and was down 0.1%. Stantec was down 2.1%.

Meanwhile, the Alberta government upgraded its economic outlook and estimates that Alberta’s GDP will have grown 4.0% in 2017 when the final numbers have been tallied.