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Regular readers know that I love to play basketball. I played growing up, and I've never stopped.
Here's the thing: I'm more than twice as old as many of my would-be opponents. That means I have to provide my team with a reason to give me playing time.
Turns out, I can still shoot three-pointers.
Since the longer shot is worth 50% more than the shorter ones, the ability to sink three-pointers is a sought-after skill. Because three-pointers are my specialty, it's pretty easy for me to find playing time on most teams.
That's my main thing... but by adding an extra tool to my scoring toolbox, I become even more valuable. So in addition to hitting a relatively high percentage of three-pointers, if defenders rush out to me too quickly, I can still make a quick move and blow by them for a closer shot.
So my tools include both a three-point shot and a quick move to the basket. This "both and" combination keeps me playing when most of my peers have hung up their sneakers.
Today, the U.S. stock market has this same "both and" effect working for it.
And it should keep it moving to the upside despite many pundits opining that the bull market should hang up its sneakers.
Here's what's happening...
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We've Got a "Both And" Market to Profit From
The strongest current driver of this bull market continues to be the promise of tax reform, one of the three legs of the "Trump growth narrative" that has been the market's primary driver since November 2016. (As a refresher - the other two legs of the narrative are reduced regulation and the prospect of increased infrastructure spending.)
BIG, FAST PROFITS: This one pick paid 100% in seven days, then 205% the next day, and 410% by the next week. You've got to see how it's done...
Here's why I believe tax reform continues to be the biggest - but not only - market driver.
In classic fundamental analysis, a stock's price should be the net present value of all future cash flows. Said another way - today's stock's price should reflect the value of all future cash generated by the company, discounted back to today's dollars.
It's quite a theoretical exercise to figure out how much extra cash flow the reduction to a 21% top-tier corporate tax rate will make. Especially when you add in the effects of accelerated depreciation and the tax holiday for repatriation of corporate cash held overseas and other less-impactful items...
And until companies start reporting their earnings results under the new tax regime, analysts won't have a full picture of the potential effects of the tax law changes.
It's true that we're getting some idea of what to expect during the current earnings season, but it won't be until next quarter that we start to see actual results reported under the new law.
And more importantly, I firmly believe the true impact of tax reform is still being undervalued by the market.
But there are very smart analysts out there who have come out with numbers to show that the strong first three weeks of 2018 are not because of tax reform, but are just the results of continued strong earnings and strong global economics.
Johnathan Golub, the chief U.S. equities strategist at Credit Suisse, just published some very interesting data backing up that claim.
I want to share it with you, because it'll really give you the full picture of what's driving these remarkable gains right now...
Here's the "And" Factor at Work
Golub says that the year-to-date (YTD) market run-up has more to do with global economic strength than the tax cuts. He provides this chart to back up his assertion.
The "EM" in the chart above is the emerging market returns, while "US" is, well, us - the United States - and "EAFE" represents Europe, Australasia, and the Far East.
Golub is quoted in The Financial Times saying, "if taxes were the driver, the U.S. would be outpacing other regions."
In addition, Golub claims that YTD returns can be more attributed to interest rate sensitivity than to tax impacts.
He provides this chart to defend his position.
Business Insider quotes Golub's description of the chart, saying that if the stock market's strength was being spurred by taxes, "sectors benefitting more from tax changes would be leading sectors with smaller tax burdens (lagging)."
Rather, we see interest rate sensitivity being the important factor.
My conclusion? Like my three-point shot punctuated by an occasional drive to the basket, I believe we're seeing a "both and" market. A market where "both" tax reform and global growth are driving the broader market - "and" a market where sectors that will be hurt by rising interest rates are being pushed aside early in the year.
The bull rages on. We're seeing historic numbers, like the most consecutive positive months since the 1950s, and the S&P 500 index above its 50-day moving average by more than 5.5 % - which could be the biggest gap ever.
So yes, we're due a pullback. And a drop of 3% to 5% would actually be healthy for the market so that it can make the next push up. But a monumental drop from these levels has a very low probability, because as I've said many times, broad market indexes just don't like to crash from all-time highs.
D.R.'s paid-up subscribers are getting the chance to play this "both and" market for big, fast gains. One of his recent recommendations on a chip maker shot past 100% gains in barely six days. Click here to learn how to get his picks. Subscribe, and he'll send you his book, The 10-Minute Millionaire at no extra charge.
About the Author
D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.