Bet on Trendlines Not Headlines

Don’t worry about turmoil in Washington affecting your investments.

The market will continue to move higher later this year, one noted strategist says. That’s despite questions about White House leadership and a delay in their legislative agenda. In fact, at least in the short term, the gains may even accelerate.

The “Trump bump” has been the prevailing narrative since November. But that’s not the only thing pushing markets higher. In fact, Colas, ace market strategist at Convergex, says investors might be giving the president too much credit for the run-up.

Earnings and the likelihood of tax reform ahead of the 2018 midterms are the keys to further stock gains, Colas claims. And neither appear to be in much real danger.

In other words …

Important market moves are bigger than single figures or isolated events. It’s a repeated theme in “Reminiscences of a Stock Operator,” the 1923 fictional account of legendary trader Jesse Livermore.

Livermore learned the hard way that big moves are about big ideas. And big moves take time.

The resurgent corporate earnings story has been in the making for a long while. FactSet, the meticulous tracker of financial results, reports Q1 profits for the Standard & Poor’s 500 Index rose 13.5%. That is the best since the fourth quarter of 2011.

Gains were 20.9% for companies getting more than half of their sales outside of the United States. Information Technology and Energy led the way higher.

Regardless of short-term political problems, major trends — like advances in technology — will always advance.

Coincidentally, these companies stand to benefit disproportionally from tax reform. Under a House plan, energy companies would be able to immediately write-down capital investments. Another plan lets tech companies repatriate billions in overseas profits at only 8.75%. That’s a fraction of the current 35% rate.

It would be nice if President Trump could drive meaningful tax reform across the goal line. But Colas does not believe his leadership is indispensable. Early turnover in the White House might actually help Republicans refocus. It might lead to a shorter-term 3% to 5% rally, Colas says.

Meanwhile, earnings are steadily improving. They are more-predictable because the global economy is on the mend. And because radical new productivity tools born in the Information Technology Age are becoming mainstream.

I have written at length about robotics, cloud computing and the Internet of Things. Information technology is touching every sector. It’s pushing the limits of what is possible. It’s making companies more productive … and this leads to better earnings.Earnings and tax reform may be a harder sell than the Trump bump with non-professionals in the market. With prevailing sentiment, catchy almost always wins. However, beneath the slogans, real market dynamics are at work.

So, when the headlines hit last week President Trump had fired FBI Director James Comey, cable news political pundits talked about end games. And stock futures tanked early Wednesday, at least initially. However, they began to firm by mid-morning. By the end of the session, stocks were still trading lower but near their best levels of the day.

Colas says his internal-sector and asset-price correlations support the thesis that investors are betting on fundamentals.

Livermore would have looked at market leaders Apple (AAPL), Amazon (AMZN), Netflix (NFLX), Facebook (FB) and Alphabet (GOOGL) pushing to new highs in the face of a Constitutional crisis. He would have concluded the message of the markets is: The trend remains intact.

It difficult to see the bigger picture. Markets are always full of false narratives.

That is one of the things I do for my members. I help them understand not all news is pertinent. Most, even some sensational items, will not change bigger trends. The key is to find the right ideas and have the courage to hold them until the trend changes.

Remember, big moves take time.

Best wishes,

Jon Markman

 

 

 

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One comment on “Bet on Trendlines Not Headlines

  1. T6 May 16, 2017

    “Early turnover in the WH”? What the hell does that mean?
    And constitutional crises? What the hell are you talking about?
    You and your ace market strategist, Colas, are acknowledging
    the nice gains in the market since the November election and the
    likelihood of strong gains to come but somehow you don’t associate
    the gains with announced Trump policy plans. Being an anti Trumper
    is certainly the rage today and you can have a seat at the table without
    criticism but your bias is clouding your thoughts on market performance.

    Reply