Economic guru Charles Gasparino warns savvy investors to get ready to head for the escape hatch if President Donald Trump fails to enact his sweeping tax reform.
The Fox Business Network senior correspondent wrote for the New York Post: “Without tax cuts, one Wall Street executive told me, “the markets will drop like a rock.”
Gasparino explained that the market has been able to handle the continued delay in promised tax cuts just fine, “but if tax reform bellyflops the way ObamaCare repeal did, many smart analysts are coming to the conclusion that the market will turn sour.”
Gasparino cautioned to remember as much as stock values represent economic and corporate fundamentals, they also represent raw emotion known as the herd mentality.
“And that mentality, according to the investors I speak to, has begun to shift in recent weeks, Gasparino wrote.
“The same investors who took the glass-half-full approach to the market now foresee the market boost running out of gas without the promised tax cuts. True, stocks are soaring, but you hear the word “over-valued” more and more, meaning an economic jolt — like tax cuts — is needed to prevent a sharp correction.”
Meanwhile, U.S. fund investors regained an appetite for risk over the last week, rushing into U.S. and emerging-market stocks, according to data on Thursday from Lipper.
Stock mutual funds and exchange-traded funds (ETFs) overall attracted $5.4 billion in the week ended Oct. 18, while emerging markets pulled in $2.3 billion, the most cash since March, according to Thomson Reuters’ Lipper research unit, Reuters reported.
For equity ETFs, the SPDR S&P 500 and iShares Core MSCI Emerging Markets contributed the two largest net positive flows, attracting more than $4.6 billion and $1.4 billion in new cash respectively, Lipper said.
Invesco Ltd Global Market Strategist Kristina Hooper said economic growth was not enough to explain the stock gains. The S&P 500 has delivered more than a 16 percent return this year, including dividends, and some 350 percent since its March 2009 lows, yet U.S. gross domestic product growth has been averaging around 2 percent annually.
“This is not explosive growth, and yet we have a stock market that’s moving higher largely based on expectations of what’s going to happen,” said Hooper.
Trump is looking to overhaul the country’s corporate tax system, a move that would be seen as a positive for stocks.
“I‘m concerned in the U.S. that there’s greater vulnerability because stocks have been on a tear and a lot of it has been based on sentiment as opposed to fundamentals,” said Hooper.
Stocks have posted a string of record highs in recent weeks, and the Dow closed above 23,000 for the first time on Wednesday.
(Newsmax wires services contributed to this report).
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