UP, UP AND AWAY
The Dowis soaring, but will the GOP tax plan be enough to keep the huge gains from 2017 going?
Just three trading days into 2018, the world’smost widely watched stock market gauge blew past 25,000 points Thursday for the first time in history, capping an astonishing, multi-month surge.
Tech stocks helped fuel an impressive 25 percent jump last year in the DowJones Industrial Average stock index, and the stock rally has continued apace in early 2018.
Call it irrational exuberance. Call it an example of a strong business climate. Call it proof of the “Trump Bump,” if you will. (President Donald Trump surely has gotten behind that one.)
Whatever the cause, American stocks are on steroids. And investment experts say that if corporate earnings remain strong, Trump’s tax reforms could help stocks continue climbing this year.
The Dow reached five 1,000-point milestones last year. From the end of 2016 until the last day of trading on Friday, Dec. 29, 2017, the benchmark stock index climbed almost 5,000 points, to finish the first calendar year of the Trump Era at 24,719.22 — a 25 percent increase.
And now, with 2018 barely under way, the Dow has topped 25,000, reaching an intraday high Thursday of nearly 25,106 points, before closing
at 25,075.13.
“Needless to say, stocks have surprised a lot of people,” said Sam Stovall, chief investment strategist with CFRA Research. “I think a lot of the gains were driven by anticipation over the (recently passed) tax cuts that acted like a carrot that urged the mule forward. There’s also hope the tax cuts will give a boost to corporate earnings, which always makes investors happy.”
The Dow includes the stocks of the 30 companies judged to bemost-representative of the industries leading the U. S. economy. The blue chip index’s primary Bay Area components include some of the world’s largest technology companies.
With amarket capitalization of around $880 billion, Apple is the biggest of the big on the Dow. The Cupertino-based company — fueled by renewed growth in sales of iPhones and iPads, a surging apps and services business, and even solid increases in sales of Mac computers — saw its shares climb 48.4 percent in 2017, to end the year at $169.23.
Other Bay Area Dow members also enjoyed huge gains in 2017. Cisco Systems’ shares rose 31.3 percent, to finish 2017 at $38.30; Intel’s stock price climbed by 27.3 percent, to $46.16; Chevron shares ended the year at $125.19, or 10.6 percent higher; and Visa climbed by 47 percent, ending 2017 at $114.02 a share.
Other companies with notable presences in the Bay Area also started 2018 looking to improve on last year’s gains. Microsoft shares rose 40.7 percent in 2017, to $85.54, and Goldman Sachs finished last year with a gain of 7.7 percent, at $254.76.
This year’s early milestone came after two days of upbeat, ifmuted gains, as investors came back to the market following the threeday New Year’s holiday.
Stovall, of CFRA, said most years begin with investors taking some time to feel out the status of the market, and the direction it is likely to take over the next several months.
“People don’t like negative volatility, but we may see some profit taking early in the year,” Stovall said. “We’ll want to wait and see if the economy will continue to improve and corporate earnings estimates will be rising. I also don’t think the tax cut has been factored into many market forecasts, yet.”
The centerpiece of the GOP tax plan cut the corporate tax rate to 21 percent from 35 percent, allowed for full deductions of capital expenses, and cut the levies applied to bringing overseas profits back into the U.S. Eric Schiffer, chief executive of Los Angelesbased private investment firm the Patriarch Organization, said lower tax on repatriating overseas cash is seen as potentially beneficial because it could inspire companies to engage in everything from more acquisitions and stock buybacks to greater capital spending on factories and facilities.
That could have a big impact on Bay Area companies, since many tech giants are known for stashing as much cash as they can overseas to avoid being hit with taxes they would rather not pay.
According to Bloomberg data, Apple keeps about $257 billion in cash, ormore than 93 percent of its total cash holdings, outside the U. S. Cisco holds an even greater portion of its cash in foreign markets, with almost 96 percent of its $68 billion outside the country. Google parent Alphabet has $92.4 billion, or 60.3 percent of its total cash, in overseas markets.
To be sure, the tax cuts are expected to give a boost to the market’s strong performance, but that is not a guarantee. Mike Wilson, chief investment officer at Morgan Stanley Wealth Management, said in a note to clients this week that it’s possible any tax-cut benefits could be short-lived.
““While the tax cuts just enacted in theU.S. may lead to better growth in the short term, they may also bring forth the excesses we typically see before a recession, which is something credit markets figure out before equities,” Wilson said, as reported by Bloomberg.
Schiffer said investors may be looking for companies to pass along some of those benefits from repatriated cash, which could lead stocks to gain more ground this year.
However, Schiffer said keeping an eye on a company’s basics, like earnings and revenue, should also be part of any investor’s market strategy.
“You always should look at what the fundamentals are,” Schiffer said. “If fundamentals are strong, companies giving a lot of money back, and using a fair amount of cash for expansion efforts, those are all good things for investors.”