In the iconic 1980’s Wendy’s commercials, a trio of older women examine a competitor’s hamburger offering. One drops the classic line “Where’s the beef?”
It’s a line still in use today. After all, when it comes to many aspects in life, focusing on the substance rather than the fluff matters.
That’s why I’m concerned—but not fearful—when it comes to the stock market’s current rally.
That’s for a few simple reasons.
First, the rally has been going on since March 2009, over eight years now. It’s a record for length, and is closing on the record for the percentage gains as well. That’s unusual.
Second, the pullbacks we’ve had along the way have been shallow and brief. Markets have barely gotten to 10 percent correction territory before recovering and heading to new highs. And it’s now been two years since we’ve even seen that much of a correction. In 2017, the number of days with only a 1 percent decline in stocks can be counted on one hand. Historically, a 1 day percentage move up or down can be pretty normal.
So not only are stocks heading up, they’re doing so with far less volatility than in the past.
A lot of this can be explained rather simply with a simple question: What’s the alternative? The alternative to stocks is typically bonds. At today’s yields, however, investors can get better income out of many stocks, including typically safe sectors like telecoms and utilities. I get it. But interest rates are gradually creeping up. That means that money will be gradually attracted to bonds as higher yields mean lower prices.
Outside this competition between stocks and bonds, however, other issues remain. While the economy is chugging along, it’s doing so at a slower pace. Many traders don’t seem to mind, however. They figure the economy will grow faster going forward, thanks to things like health care reform and tax reform.
This brings me to the market rally’s beef. After seven years of promising to repeal and replace Obamacare, Congressional Republicans have failed on multiple attempts to do so.
While they could have simply sent any of the dozens of repeal bills they sent to President Obama’s desk to President Trump, the bills voted down this year were, on the whole, weaker proposals that should have passed muster.
Whether Republicans were simply grandstanding for seven years to get votes or lacked the courage of their conviction out of fear of election losses doesn’t matter. Health care reform doesn’t seem capable of passing at the moment. That leaves a huge drag on the economy, and a huge liability for the government that will undoubtedly lead to a bigger crisis later.
But hey, there’s always tax reform, right?
Maybe, maybe not.
While cutting taxes is a core Republican policy position, there are plenty of ways to cut taxes. While the U.S. has some of the highest corporate tax rates in the world, that isn’t always the case after factoring in various exemptions, deductions, and other pieces of the complex corporate code. A corporate tax rate may stimulate economic growth—or it may give corporations the opportunity to simply pay bigger bonuses or buy back shares.
A share buyback can be good for a company’s share price, at least in the short term. Over time it’s growing the business that matters, however. Tax reform is no guarantee of a sustainable growth in business.
And even tax reform looks dicey right now, given the chilled relations between President Trump and Congressional Republicans. His brash outsider approach has led to difficulty with his own party. That’s reminiscent of President Carter’s relationship with the Democratic-controlled Congress during his sole term in office.
If you can’t get your own party on board with your ideas—or if a President can’t be flexible to give his party what they want on legislative issues— it’s a recipe for gridlock. That’s normally fine for the business community. Gridlock means no new major rules or regulations for them to comply with. But it also means any chance for changes that could improve are gone as well.
With many market participants expecting major changes on issues like tax reform and healthcare, the fact is, the only major change nine months into Trump’s presidency has been in the halt of regulatory growth. That’s a potentially powerful area that can help the economy grow faster, but it pales into comparison to what can be done.
Without this beef, the stock market remains in an area where it’s overvalued based on historical valuations. And while the alternatives are worse, they’ll look better (or at least less bad) as time goes by.
That’s why today’s investors should look into making a few strategic moves here. One of those is covered call writing. That allows investors to protect their gains in positions while keeping shares. Investors can also use one of the market’s rare down days to buy call options on fast-moving names in the market like tech stocks. When those shares rebound, investors can make some small, but meaningful profits. It’s a better alternative to buying shares outright in high-flying tech names that could take a big loss in a market correction.
Investors could also buy insurance against market and inflation fears in the form of gold. The metal had five years in the market’s doghouse, but posted a gain last year and is still set to gain nearly as much as the stock market this year. It’s been a quiet rally, but major investors are moving their money into gold. Given how commodities tend to rally over multi-year periods, this is one area that still has a lot of room to run.
We don’t need to panic. The market can keep going. But how we look to profit going forward can be the difference between sitting through a major correction or making some additional gains along the way. This market has a lot of fluff and little beef. Tread cautiously.
Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.
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