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The Times—Are They Changing?

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way –“ Charles Dickens, “A Tale of Two Cites”


2017 certainly qualifies. No matter what your view, this year had plenty of reasons for distress. Geopolitical tensions, massive natural disasters, political gridlock and sexual harassment scandals, all weighed us down. Fox News or CNN, it didn’t matter. The news, facts or alternative facts, was depressing.

In spite of it all, the economy and the markets seemed like they were on a different planet. The S&P 500 is up 20% as of this writing. The S&P 500 has had positive returns every month this year. Volatility has been extremely low. We have gone without a 3% correction for over a year. International stocks have been even stronger. Worry, what worry?

How do you reconcile these two conditions? Actually, you don’t. The markets are not concerned about politics, the weather, or scandals; they are concerned with the economy. And, in the world as it is today, that is the global economy. Of the major economies around the world, almost all are showing positive economic growth.


Look at the situation in the US. It has taken a long time to crawl our way out of the financial crisis but the evidence that we have recovered is getting stronger and more consistent. This will carry into 2018. We have had two consecutive quarters of over 3% growth and expectations for the fourth quarter are good. Unemployment is at 4.1% and jobs are being added at a healthy pace. Business and consumer confidence are strong. Housing has seen an uptick. Despite the recent Fed action, interest rates are still low. And all that was in place before the Tax Cuts and Jobs Act was passed by Congress.

The North Korean nuclear threat and protectionist rhetoric may represent the worst of times. But geopolitical tensions notwithstanding, the global economic situation is strong and supportive of the stock market. In nearly 80% of countries, manufacturing figures are up. Again, if you listen to protectionist rhetoric and follow the antitrust actions against technology companies, you might be concerned. But the bottom line for markets is growth and the growth is in both the developed and emerging markets.

Tax Cuts

The most recent “Best/Worst” situation may be the Tax Cuts and Jobs Act. Identifying the best of times is easy. Most, though not all, people will see a tax cut at least in the short run. There are exceptions but Congress avoided many of the real tax reform proposals that would have impacted individual tax payers. If you are one of the 30% who itemize, your individual results may differ but there are benefits at all levels of the income scale. The wealthier you are the more you benefit, assuming you don’t live on in a high tax state. On the corporate side, there is much to like for shareholders. The stock market will benefit even as it sorts out the winners and the losers. The jury is still out for employees.

The worst of times is really no harder to identify. The bill does little to reform or simplify the tax code. Winners and losers seemed to be more driven by political considerations than economic ones. But the big “worst” is the impact on the deficit. The pleas that the tax cut will stimulate so much growth we don’t need to pay attention to the deficit, are not substantiated by economic analysis. But for now, we have the stimulus. That is what the market is focused on and that should carry us well into 2018 and beyond.

Best of Times

As citizens there seems little respite from the worst of times but as investors we can ignore the 6:00 o’clock news. This economic environment is a good backdrop for corporate profits. And profits are what drive the stock market. 2018 will likely bring increased volatility and unforeseen risks, natural or man-made, will be realized. That 3%+ correction is in our future but that is not a bad thing. The good times can continue even if we get no respite from the bad times.


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