Remember when Dow 20,000 was a big deal? It was less than a year ago that the Dow Jones industrial average reached 20,000 for the first time, but in the end, Dow 20K was just a blip on the radar screen.
Since the 20,000 milestone was breached on Jan. 25, the Dow set record after record with sometimes amazing frequency, powering past four 1,000-point milestones for the first time in history. The Dow set 63 record highs so far in 2017, and hitting 25,000 by the end of the year is no longer out of the question.
But can it last?
Many financial advisors, academics and economists say that the market, despite its record-setting ways, is nowhere close to being a frothy bubble. Instead, they describe an economy that remains strong and has plenty of room for more gains should the tax reform package become reality.
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“Just because U.S. stocks have gone up a lot does not necessarily mean bubble,” says Scott J. Kolman, a finance lecturer at San Diego State University. “Today’s stock market is not like the stock market of the dot-com era, nor the real estate market of last decade.”
Recent highs are powered by expectations that Congress will pass a tax reform package being touted by President Donald Trump. It would slash corporate taxes, increase the personal exemption on individual income tax, eliminate many deductions and add more than $1 trillion to the national debt.
Brad Bernstein, senior vice president at UBS Wealth Management Americas, says the market has not fully factored in tax reform yet, despite jumping more than 22 percent so far this year and 10 percent in the last three months.
UBS is projecting the Standard & Poor’s 500 index to reach 2,600 — a 9 percent gain — in 2018.
“If corporate taxes get to 20 percent, there’s an upside risk of far greater return. There’s a potential for 25-percent-plus returns for next year, depending on the tax cuts,” Bernstein says. “The fiscal stimulus of tax cuts will be like kerosene for the markets.”
John Burke, CEO at Burke Financial Strategies in New Jersey, says fears of new government debt from the tax plan are also unfounded. The Congressional Budget Office, he says, is too conservative in projecting a 1.9 percent annual real growth rate in U.S. GDP, because the economy grew at 3.4 percent from the end of World War II to 2008. It was also too conservative in projecting the impact of tax cuts proposed in the Reagan and Clinton administrations, he says.
“The market is currently reacting positively to the proposed tax reform,” Burke says. “And it should.”
Sean O’Hara, president of Pacer ETFs in Paoli, Pennsylvania, attributes the bullish market to sentiment and sound market fundamentals.
“The business community seems to feel much more optimistic under the current administration. We have gone from an administration that believed 2 percent growth in GDP was the new normal to one that believes 4 percent is not out of the question,” he says.
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“As far as numbers go, we now have 3.3 percent GDP growth, low inflation, low interest rates, low unemployment rates and rising profits,” O’Hara says. “Either way you look at the current market, a case can be made that unless things change drastically for the worse, the current levels are not unhealthy.”
While experts are expecting the markets to stay the course into 2018, there are some who are more cautious.
“The stock market gains over the last 12 months since the November 2016 election, coming off of large gains over the last eight years following the large market decline in 2008-09, is difficult to understand and not sustainable,” says Len Rosenthal, a finance professor at Bentley University in Massachusetts. “Whether we are in a bubble can only be determined after a downturn or crash, but it sure feels like one.”
Dave Lauton, a finance professor at Bryant University in Rhode Island, says he is expecting a market correction in 2018.
“While I agree that some industries may be over-regulated and the cost of compliance has become an increasingly significant burden for all firms, especially those in the financial services industry, I can’t help feeling surprised at the intense enthusiasm for deregulation given that only 10 years ago it almost led to the collapse of the world economy,” Lauton says. “Our own economy’s growth has been weak until recently, with some version of Federal Reserve life support still in place even after all this time.”
But others agree there is plenty of reason for optimism for the stock market headed into 2018.
“We understand why investors who are focused primarily on the U.S. are concerned about the recent run-up in U.S. equity prices and worry that the rally might be fatigued,” says Ronald Sanchez, chief investment officer at Fiduciary Trust Company International. “However, when we look at the U.S. market from a broader perspective — supported by the underpinnings of a strong global economy, improvements in corporate earnings, muted market volatility and easy financial conditions — current market prices appear largely justified.”
[See: 7 Things That Can Derail Your Retirement Investing.]
Courtney says the U.S. economy will be stronger after the tax plan goes into effect, because lower business taxes will help smaller companies compete with larger ones.
“Tax reform could ultimately set a more level playing field. Since the market started factoring in this reform, it’s been the small-value companies that have moved and the Russell 1,000 companies that have been still,” he says. ” In the long term, it is likely that there will be some economic benefits. All things being equal, this should create a more dynamic economy going forward.”
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Why the GOP Tax Plan Won’t Hurt the Stock Rally originally appeared on usnews.com
