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Wall Street: Distractions be damned — Stocks continue to break records despite volatile political environment

By BECKY GILLETTE

 

The old saying is, “Wall Street doesn’t like surprises.” But it seems to be holding up during this time of divisiveness, political discord, devastating hurricanes and twitter rants. How do financial advisers suggest you invest during these times where surprises are waiting around every corner?

Dave J. Lundgren, Jr., executive vice president and chief investment officer, Hancock and Whitney Bank, said while there is some truth to Wall Street not liking surprises, you have to think what is really a surprise that can truly negatively impact the economy and in turn corporate earnings.

“That is really what is important in terms of surprises,” Lundgren said. “What can truly be disruptive to the economy? There have been a lot of headlines made about President Trump tweets, and the ugly incident in Charlottesville. Those are major headline items that some people might think are market moving. But a lot of those headline items don’t really move the needle economically. The normal reaction from whatever the event might be might be some shock. But what does it do to the economy? It has to be at a larger level than a specific area of the country to have some kind of meaningful impact on the economy.”

Another factor is that there is, as Lundgren puts it, “a lot of money seeking investment,” whether it is baby boomers or even corporations who have a tremendous amount of cash on their balance sheets.

“When you look at the options available to you, we have been in a low interest rate world for a very long time,” Lundgren said. “In earlier life stages, baby boomers were able to purchase CDs and make 7 percent interest. But we have been in this low-rate environment since 2008 and today people get excited if they are able to make one percent on some type of safe, fixed investment. The bottom line is when you look to see where to place your money, what produces the most attractive return, that leads a lot of people to stocks.”

Another factor is the market has been remarkably stable. For example, the S&P has produced a positive return for the first nine months of 2017.

“That is not your normal market experience,” Lundgren said. “That has happened only one other time going back nearly 100 years of market history. Volatility is what scares people out of stocks, and we have had little to none of it. Even going back to 2009, at the end of the financial crisis, we have had only two small 10 percent corrections over the past eight years.  The average is one every year and a half and now we have had one in four years since the financial crisis.”

Lundgren said one thing they remind customers is that the risk is still there.

“These periods that we have gone through shouldn’t lead people to complacency to where they are thinking there is not risk in stocks,” Lundgren said. “Diversification is important. Hopefully you are working with a good financial adviser who might be able to better understand your tolerance for risk and make sure your asset mix matches up with your risk tolerance.”

Another point is that few people have an appreciation for bonds during the good times.

“It is an unloved asset class,” Lundgren said. “People think of it as an anchor when you are getting these outstanding market periods. When you get an appreciation for that part of your portfolio is when you run into a more volatile period.”

University of Southern Mississippi Assistant Professor of Finance Dr. Srinidhi Kanuri said he believes the tremendous strength of the market right now partly hinges on people being excited about tax reform.

“The U.S. has some of the highest corporate taxes in the world, and the current administration is expecting to reduce corporation rates,” Kanuri said. “Some of the big corporation like Apple or Google have operations all over the world so they can avoid bringing profits back to the U.S. to be taxed. But there are also many smaller companies that can’t take advantage of as many of those tax.”

Kanuri said firms represented by the Russell 2000 index, which is the 2,000 of the smallest firms in the U.S, generally pay higher taxes than big firms. He said these firms pay a 33 percent income tax compared with an average of 27 percent for big companies able to take advantage of tax loopholes.

“The Russell 2,000 has gone up even more in expectation of this tax reform, but it has to be backed by earnings,” Kanuri said. “We will know soon if these companies have the earnings to support the increase in price — whether earnings match up to the valuation.”

Kanuri said it might not be the best time for a small investor to enter the market, but small investors can invest small amounts every month through Index mutual funds. With stocks at record high levels, some people might consider it time to sell. Kanuri said that decisions depends on your personal condition and needs.

“If I was in the market, I would stay put because the market has been going up,” he said.

Bonnie Van Ness, Ph.D., finance department chairwoman, the University of Mississippi School of Business Administration, and Robert Van Ness, director of doctoral programs in the finance department at Ole Miss, said the slow, steady growth is good for the economy, but growth (in the long run) tends to be uneven, not steady from year to year.

“Corporate earnings and unemployment are currently positive, but if these change (or perhaps something else the market views as negative happens), the market will incorporate that information quickly,” they said. “There was an article recently on CNN talking about a market ‘melt up,’ which addresses the issue of continued market increases. Something interesting to consider is the CNN Money’s Fear & Greed Index, which is a market sentiment index. The article states that the index is signaling ‘euphoria’ and ‘extreme greed’ right now, which does not exactly bode well for market.”

Some “knowledgeable” people are always predicting a continuation of current market trends while others predict the opposite of what is currently happening. So, someone has to be right.

“Markets have corrections — the trigger of the correction may be lower corporate earnings, an increase in unemployment, war, etc.,” the couple said. “When the market is making new highs as now, market participants are euphoric and do not necessarily see the correction coming. Bull markets, like all good things, must come to an end, but right now, the current uncertainties do not seem to be outweighing the positive economics. We do not have crystal balls and do not know when the next correction will occur.”

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