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Can this Bull Market Continue?

As Mark Twain once wrote, “The reports of my death are greatly exaggerated.” And so we believe it is with this bull market. Although this bull market is growing “older”, that doesn’t mean it doesn’t still have room to run.1 Contrary to some pundits, we believe this bull market needs no mortician. Below are some of the reasons we believe this secular bull market will live to fight another day:

  1. Increased Earnings Estimates – 4th quarter earnings to be reported later this month and in February in many cases should beat the estimates. We also look for companies to raise guidance and analysts to raise estimates. The net impact of reducing the “effective tax rate” could add between 6-8% to earnings in 2018. According to Raymond James analysts, “Consensus is looking at 11% earnings growth this year which may be revised a little higher or a little lower but incorporates the tax impacts as best as can be figured.”2

     

  2. Lower Tax Rate - As a result of the lowered corporate tax rate and repatriation of overseas assets, we expect companies to increase dividends and stock buybacks, as well as capital spending and jobs.

     

  3. Increased Consumer spending due to lower tax withholding

     

  4. Interest Rates - Flat yield curve will likely make the Fed think twice before increasing rates.

If you have cash, CDs, or money market funds on the sidelines, now may well be the time to put it to work.

Specifics of the New Tax Plan

The specifics of the new tax plan can be nebulous at best. Below are some of the main elements of the new plan:

  • The final tax bill sets a corporate tax rate of 21%, down from 35%
  • A top individual rate of 37%, down from 39.6%
  • Repeal of the corporate Alternative Minimum Tax
  • Increase in the estate tax exemption
  • $10,000 deduc­tion for state, local, sales or property tax (SALT)
  • 100% deduction of capital expending for five years
  • Repeal of the individual mandate of the Affordable Care Act3

Energy

Independent refiners previously paid corporate tax at, or close to the statutory rate of 35%. Therefore, the cut to 21% is clearly beneficial for them.4 Our prediction is that the price of oil may average around $65/barrel this year and could reach as high as $70/barrel. However, we believe energy stocks will outperform the price of crude oil. Below are a few of the reasons we still like the energy allocation of our portfolios:

  1. OPEC raised its global demand forecast for 2018, led by global economic growth – Increasing Demand
  2. OPEC reiterated its determination to tighten the oil market – compliance up more than 100% amongst the members – Decreasing Supply
  3. Demographic population growth in emerging market countries like China & India – Increasing Demand
  4. Factors that limit the potential for a supply interruption domestically i.e. access to trucks, labor, water, sand etc. Decreasing Supply
  5. Geo-Political Risk – Venezuela, Saudi Arabia, Iran – Supply Risk, not currently priced into market5 – Decreasing Supply

2018 Outlook

As you know, January has historically been a strong month for the market. Most companies determine if they need additional amounts on their pension fund balance sheets the last day of the fiscal year. The resulting contributions tend to boost the stock market in January.6

For these reasons, we believe predictions of the death of the secular bull market are premature. Although we never claim to have a crystal ball, this bull market could have close to a decade of life to live.

We trust you and your family have a happy, healthy, and prosperous New Year!

Sincerely,

malcom sign

Malcolm C. Tarver, III

Senior Vice President, Investments

Certified Investment Management Analyst ®

 

1Doug Ramsey, CNBC, December 18, 2017

2Nick Lacy, Tax Reform: Perspectives from the Raymond James Investment Strategy Community, December 21, 2017

3Ed Mills, Done Deal: Tax Reform Passes Congress, December 20, 2017

4Pavel Molchanov, Tax Reform: Perspectives from the Raymond James Investment Strategy Community, December 21, 2017

5Jeff Saut, “Boone”, December 29, 2017

6Louis Navellier, Blue Chip Growth, January 2018

Past performance does not guarantee future results and there is no assurance that the objectives will be met. Investing involves risk and you may incur a profit or a loss. The information and opinions provided have been obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed. Expressions of opinion may not necessarily be those of Raymond James & Associates and are as of this date and are subject to change without notice. The opinions expressed are provided solely for informational purposes and not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Long-term investing does not insure a profitable outcome. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. There are additional risks associated with investing in an individual sector, including limited diversification. Investment Management Consultants Association (IMCA®) is the owner of the certification marks “CIMA®,” and “Certified Investment Management Analyst®.” Use of CIMA® or Certified Investment Management Analyst® signifies that the user has successfully completed IMCA’s initial and ongoing credentialing requirements for investment management consultants.

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