Lower Taxes On Investors?


Update On The Coronavirus

Currently, Hubei has a work suspension until February 20th. Obviously, the best case scenario is the suspension is lifted shortly. But that might not happen if deaths continue to rise along with confirmed cases. Specifically, as of February 14th the number of deaths rose 143 to 1,523 and the number of confirmed cases rose 2,641 to 66,492. 

A total of 217 medical teams and 25,633 workers have been sent to Hubei. As you can see from the chart below, the number of visitors to Hong Kong per day has fallen to 3,000 from 200,000 which is the lowest in at least 20 years. There have been confirmed cases in Hong Kong which is why travel has plunged.

This situation is similar to the weakness in manufacturing last year in that we keep hearing traders saying this is temporary, but the negative situation keeps going. At what point should this hurt stock prices? Since the bottom on February 3rd, the Shanghai Composite is up 6.2%. 

It’s only down 4.36% year to date even though GDP growth could be negative in Q1. Investors don’t put much emphasis on a quarter’s results if it had a negative one-time factor. However, if this drags on longer how much of an impact will have on Q2 and beyond?

What Can Push This Market Lower & Higher?

S&P 500 was up 0.18% which put it at another record high as it is up 4.62% year to date. Many are just waiting for the market to fall quickly on the possibility of Sanders winning the Democratic Primary. If he doesn’t win, it’s smooth sailing even though stocks are modestly overbought. 

While the S&P 500’s forward PE multiple is at 19, which is modestly high, I don’t see that as a catalyst that could push stocks lower. It just means forward returns will be lower. We need a negative catalyst like Bernie winning most states on Super Tuesday to push them lower.

When stocks are expensive, they have an increased propensity to fall. Any negative catalyst can push them down 10%. Don’t let the market’s reaction to the coronavirus fool you into thinking stocks are impenetrable because they aren’t. On the positive side, the White House plans to unveil a package that allows small investors to invest in the stock market tax free. It’s similar to a Roth IRA except you don’t need to wait until you retire to take the money out. 

This will bring more investors into the market which could potentially permanently increase the stock market’s PE multiple. Think about how much lower stocks would be if there was no such thing as tax free retirement investing. It’s unlikely to become law unless Trump wins re-election. It’s like a teaser to get support from voters. Even if it became law before he left office, a Democrat might eliminate it as soon as they came to power.

Details Of Tuesday’s Action

Nasdaq rose 0.2% and the Russell 2000 fell 0.36%. After outperforming big caps for 3 straight days, the small caps fell. It’s impressive the Russell 2000 did that well considering that long term bond yields are so low. It’s a tough situation to be a bank right now. 10 year yield fell 3 basis points on Friday to just 1.58%. It’s only 15 basis points above last year’s low. 30 year yield has been in complete free-fall which has been a boon for the utilities. It fell 3 basis points to 2.04%. It’s just 14 basis points above last year’s low which was its all-time low.

As you can see from the chart below, the OIS market is predicting the Fed to cut rates twice this year. Considering a cyclical upturn in 2020, if the Fed were to cut rates twice it could really cause the economy to roar. Maybe that’s the scenario the bulls see in 2021. Which is why they are paying 19 times forward earnings.

Utilities rose 0.65%. People often talk about tech being in a bubble when it’s not. Biggest dislocation is in utilities. But they will keep rising if the long bond yield keeps falling. The sector is up 15.26% in the past 6 months. Utilities production has been weak this winter because of the warm weather. But no one is buying these stocks for their earnings anyway. They want the yield. 

However, the chase for yield hasn’t helped Altria, which is why I like it and its 7.4% yield. Biggest winner was real estate which rose 1.11%. And the biggest loser was energy which fell 0.81%. Consumer discretionary sector fell 17 basis points after the modestly weak retail sales report. IHF index fell 0.75%. I think it makes sense to short health insurance stocks as a hedge against Bernie winning. It’s a cheap hedge with them doing so well.

Democrat Primary Update

There still wasn’t another national poll which could qualify Bloomberg for the Wednesday debate. His odds of making the stage fell from 90% to 65% in one day. It’s basically the odds of there being one more poll because he will likely get at least 10% support if there is a poll. Latest Nevada caucus poll showed Bernie is up by 7% on Biden. 

As you can see from the table below, Bernie does well with Hispanic voters. The caucus is on February 22nd. Bernie has a 76% chance of winning.

A South Carolina poll showed Biden up by 8 points on Sanders. But Biden lost 9 points from 2 weeks prior and Sanders gained 6%. If Sanders wins Nevada, he should gain enough momentum to make it close in South Carolina. If Biden doesn’t win, he might drop out of the race. He has a 55% chance of winning. 

A Texas poll showed Sanders up 2 points on Biden. Bloomberg was 14 points behind. Sanders does well in the West and Bloomberg does well in the Southeast. Finally, a Florida poll showed Bloomberg up 1 point on Biden. Sanders was 17% behind. This was the first state poll I’ve seen with Bloomberg winning.

The post Lower Taxes On Investors? appeared first on Theo Trade.

Source: First Rebuttal

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