WASHINGTON, November 1, 2017 – Our financial columns return today after a rather lengthy hiatus due some inner ear issues plaguing this writer. Ranging from pain, to hearing loss to occasional loss of balance, this has severely impeded writerly inspiration. Yet the stock market, like this writer, is also suffering from a loss of balance due to its latest attack of irrational exuberance, the kind that worried former Fed boss Alan Greenspan back in the dot.bomb era.
While we’ve been on hiatus, the market’s direction hasn’t always been straight up. It’s been straight up with the occasional scare. On the other hand, each scary down day seems to breed at least an equal and opposite up day that zeroes out the negative numbers.
The narrow but still marquee Dow Jones Industrial average has been leading investors onward, as it seems eager to break new ground by jumping over the 24,000 mark for the very first time.
All this irrational exuberance seems to pivot on two things:
- A relatively impressive Q3 “earnings season;” and
- The slam-dunk guarantee that the Trump-Republican tax reform package will bring back the go-go 1980s and 1990s with a vengeance.
It’s that second point that worries us.
Back in this writers days as a stockbroker-trainee, he and everyone else was taught that even thinking the word “guarantee” was something akin to having the Mark of Satan. Actually saying that word, particularly to an investment client, was worse than original sin. Being put on report for saying it could potentially lead to SEC actions against you, your brokerage company, or the known financial universe. (Or so we were told.)
This emphasis on the sheer evil of “guarantee” was doubtless encouraged by Wall Street lawyers who wanted to avoid consumer lawsuits at all costs, even though then, as now, such issues almost always went to binding arbitration for eventual resolution. Yet moral, business and plausible deniability issues aside, avoiding even the appearance of impropriety remains paramount for anyone attempting to do an honest day’s work as an investment advisor.
“Guarantees” ultimately signal hubris, the Greek concept of pride, and, as we all know – or should – pride goeth before a fall.
Unfortunately, more and more of the financial writers we encounter are throwing in the skeptical towel. They’re starting to crow that the market’s latest bout of irrational exuberance is, like global warming, “real.” They claim that stocks are now likely to go up forever, maybe longer.
That has us worried.
This latest seizure of irrational exuberance is based on what amounts to a house of cards (no relation to Kevin Spacey); namely, the slam dunk probability that that big Trump-GOP tax cut will sail through Congress and end up on the President’s desk as this administration’s Christmas gift to the nation.
This is doubtless Donald Trump’s wish, and it’s a strong one. But as we learned with the slam-dunk fail of Obamacare Repeal and Replace, this Republican Congress remains the Gang that Couldn’t Shoot Straight until proven otherwise. This means there’s no guarantee whatsoever that the Fools on the Hill won’t bungle and ultimately boot the second of their so-called signature issues, tax reform, just the way they collapsed on Obamacare.
If, in fact, the Stupid Party lives up to its reputation once again, a Santa Claus Crash rather than the traditional Santa Claus Rally could close out 2017 on a seriously rotten note.
Bottom line: Don’t get caught up in the current tax cut-inspired version of irrational exuberance. If you have nice profits in one or more stocks, it might be wise to harvest at least a few of them now. If the fairy tale of meaningful tax cuts comes true, you may regret missing out on a final parabolic blowout in your favorite stocks. But taking a decent profit is never a sin, and there’s always another train leaving the station.
We’ve been sneaking out of a couple of our most profitable positions lately, taking care not to be too eager to replace them as the markets chase higher. We’ll let the rest ride. For now.
But remember: The price of profitability in the stock market, like the price of freedom, is eternal vigilance. So let’s be vigilant here as the market chases ever higher, avoiding irrational exuberance, but picking our opportunities where the masses least expect them. There will be time later to get sick of all the winning.