Record, schmecord: Dow 23K is so much ‘bull’

MR. Bull Market keeps charging ahead. But is its run about to end?

The stock market has been in a bubble for years. I’m not the only one saying that — others, including many with loads of Wall Street experience and tons of dollars at risk, have said so, too.

But I have also said that bubbles are nice while they last and that investors should enjoy this one as long as they think they can get out in time. (Don’t even give that a moment’s thought because once the bubble starts popping, you won’t get out in time.)

The market has had a couple of down weeks in a row, so I think it’s time to discuss what the end of this bull market might feel like and what might cause the euphoria in stocks to become exhausted.

Stock prices did rebound a bit on Monday, with the Dow Jones industrials rising 72.09 points to close at 23,430.33. That’s not far from its record close of 23,563.36 on Nov. 8.

But Monday’s Dow gain comes after the 30-stock index and the Standard & Poor’s 500 indexes recorded their first consecutive-week losing streak since August. And people who psychoanalyze Wall Street are worried that the market looks tired and that the rally in prices is self-destructing on low volume and a lack of enthusiasm.

This week won’t be a good one to judge what the future holds.

With Thanksgiving on Thursday, the week will be shortened to 3½ days of trading, but actually only two full days since the bulk of traders take Wednesday and Friday off.

Once this holiday is over and before Christmas distracts people again, the market will face a lot of uncertainty. That’ll be the real test. What are the main hurdles? The big ones keep changing. But right now the tax reform package being discussed in Congress has moved to the front of the line.

The House has passed a bill and the Senate is working on one of its own.

The Senate is hoping to have its bill by the end of the year — which, in case you haven’t looked at a calendar lately, is just a few weeks away.

Eventually the Senate and House will have to get together and agree on one proposal — or not agree.

Wall Street won’t like it if tax reform fails, or is delayed. And it will be disappointed if it is watered down.

But the Wall Street gurus can spot a silver lining even in a hurricane and they will be able to rationalize away this failure. So a tax reform disappointment shouldn’t be so horrific to the stock market.

The gurus have been hoping that a lower tax rate for corporations will raise company profits, which in turn will justify the incredibly high prices people have been paying for many stocks.

But, as I pointed out last week, many companies already pay less than the 25 percent corporate tax rate proposed in the House bill. And rates even lower than the 20 percent the Senate weighing.

So tax reform, at least in this way, isn’t a big deal for many companies.

The thing that might upset Wall Street the most is if companies are deprived of write-offs and loss carryforwards that currently exist. If the socalled loopholes are closed, companies will be forced to pay whatever rate is mandated in the reform bills.

That would raise their expenses, lower profits and cause Wall Street to reassess its thinking about what the Trump administration is doing.

There are, of course, other major issues facing investors, like: the feud with North Korea; problems Middle East countries are having with one another; and,

acts of domestic terror and possible foreign terrorism in the US.

Any of those could end the market’s ecstasy.

But two other problems are worth giving a little more attention.

The Federal Reserve has stated quite clearly that it intends to normalize — read that, “raise” — interest rates in the coming months and years.

That’ll be made easier to do if the economy starts to improve,e, which is something that everyone wants and that the Trump administration says is already happening.

The higher rates that are coming — along with the Fed’s other intention, to normalize its balance sheet by getting rid of bonds — will drain liquidity from the financial markets.

And as rates rise and liquidity lessens, the economy will slow.

Liquidity is what caused the stock market bubble. With too much cash floating around and interest rates too low, people had nowhere else to invest except the stock market.

So squeezing liquidity out of the economy could be damning for the stock market.

But as dangerous as higher rates will be to stocks, they will be even more dangerous for bonds, which are in an even bigger bubble.

There’s one other thing that could trip up the stock market, and that’s the legitimacy of corporate profit reports. Companies’ earnings have been rising nicely in recent years but the quality of those earnings is suspect.

According to FactSet’s John Butters, the earnings of companies in the Dow were substantially llower when reported on a Generally Acceptable Accounting Principles (GAAP) basis. GAAP is no-cheating accounting.

Butters says that 70 percent of the 30 Dow companies reported earnings in a non-GAAP — non-traditional — way.

To put it more simply, a lot of companies have been cooking their books. And Wall Street couldn’t be more thrilled — at least until Judgment Day for the market, when everyone will repent.