Technically Speaking: Have "Tax Cuts" Been "Priced In" Already?

“Did you hear the news that was driving the markets to new records this morning?

No? Yeah, me either. But such is the nature of a speculative driven frenzy.”

Since the markets were closed yesterday, there is nothing to update from this past weekend’s newsletter.

While that missive was primarily directed at why “bond bears will likely be wrong again,” I did state the following about the market:

 

“That extension, combined with extreme overbought conditions on multiple levels, has historically not been met with the most optimistic of outcomes.

Importantly, such extensions have NEVER been resolved by a market that moved sideways. But, ‘exuberance’ of this type is not uncommon during a market ‘melt-up’ phase.

Nothing changed this past week as the “melt-up” phase gains momentum. We are on track currently to ratchet the both the fastest and most numerous sequential milestone advances for the Dow in history.

You can barely print ‘Dow 2X,000’ hats fast enough.”

 

Well, as the market opened this morning, the Dow and the S&P both set the fastest pace of a milestone advance in U.S. history as the Dow crested 26000 and the S&P touched 2800.

The surge in market exuberance in terms of both individual and professional investors is generally indicative of the “capitulation phase” of an advance which is when the last of the “holdouts” finally jump back into a market which “can seemingly never go down.”

From “QE” to “Low Rates Justify High Valuations” to “Tax Cuts,” the unfettered rise in asset prices has been underpinned by a shifting narrative backing bullish sentiment.

The latest, of course, is that “tax cuts” will boost bottom line earnings giving investors a reason to bid asset prices up further.

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Disclosure: The information contained in this article should not be construed as financial or investment advice on any subject matter. Streettalk Advisors, LLC expressly disclaims all liability in ...

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David Haggith 1 year ago Contributor's comment

While you are right that the tax reduction is priced in in terms of earnings per share after taxes, I don't see that you have factored in how the tax savings will also be used for additional stock buybacks, reducing the number of shares in the denominator and increasing the demand for shares. I also don't see how you've factored in how the income-tax cuts will increase before-tax earnings by increasing everyone's buying power. There are more dynamics at play, so I think the market has more room to run (even though I hate this tax plan).

Bill Myers 1 year ago Member's comment

Good read. Giving this article a bump on the homepage.