New market thoughts from Raymond James’ Jeff Saut: “Finally, the Question” 12/22/17

“Hey Jeff, if you don’t consider a 20% decline a bear market, what do you consider a bear market?”
Finally, the question we have been expecting for quite some time: “Hey Jeff, if you don’t consider a 20% decline a bear market, what do you consider a bear market? Certainly if my clients took a 20% ‘hit’ to their portfolios they would consider that to be a bear market. Please advise.” Well, in the 1949-1966 secular bull market, there were a number of 20% declines, but it did not end the bull market. The same can be said regarding the 1982-2000 secular bull market. More recently, we would remind investors that the S&P 500 had a 21.58% drawdown between 6/6/11 and 10/7/11, but that did not stop the raging bull (see chart at right). So, here is a partial list of what we consider to be a bear market using the D-J Industrials:
♦ 6/17/1901 – 11/9/1903 (-46.14%)
♦ 1/19/1906 – 11/15/1907 (-48.54%)
♦ 9/30/1912 – 12/24/1912 (-43.54%)
♦ 11/21/1916 – 12/19/1917 (-40.13)
♦ 11/3/1919 – 8/24/1921 (-46.58%)
♦ And, of course, the 1929 and 1930s bear markets
More recently, October 9, 2007 to October 10, 2008 saw the Dow dive 40.34%. And, there is that date again, 10/10/08, so often referenced in these missives as where we think the first “leg” of this secular bull market began. Recall that 10/10/08 was when 92.6% of all the stocks traded on the NYSE made new annual lows for a seven or eight standard deviation event, which is not supposed to happen in your lifetime! Moreover, shortly after that 2007-2008 bear market began, we wrote about the Dow Theory “sell signal” that came on November 21st of 2007, which served as an alarm for the carnage that was to follow.
Moving on to the present, while we got “out of step” with the S&P 500 (SPX/2679.25) from mid-September to mid-November by being too cautious, we climbed back on board in mid-November expecting the rally to continue into the new year. In fact, we think the big equity surprise for 2018 is that it will be a repeat of 2017.
As for the passage of the Tax Bill, our D.C.-based policy analyst, Ed Mills, writes:
“The tax reform bill lowering the corporate tax rate and making a number of adjustments to the individual tax code has been approved by Congress and is set to become law. The final tax bill sets a corporate tax rate of 21% starting in 2018, a top individual rate of 37%, the repeal of the corporate AMT, a $1 million phase-out threshold inclusion for the individual AMT, a $750,000 mortgage interest deduction cap through 2025, a 20% deduction on pass-through income, an increase in the estate tax exemption (but not repeal), a $10,000 deduction for state, local, sales or property tax (SALT), 100% deduction of cap-ex for five years, maintaining the deductibility of interest from private activity bonds, and a repeal of the individual mandate of the Affordable Care Act (ACA).”
Also chiming in was our friend Dennis Gartman, eponymous captain of the Gartman Letter, who writes:
“Let’s stop wondering about whether some will be ill served by the new laws while other[s] may be better served for on balance, across the country, taxes will be lower and the country as a whole will benefit. Lower taxes are always and everywhere beneficial to economic growth, otherwise taxes would be raised continually and government spending programs would increase relentlessly. There are problems inherent in this new tax regime, and there will be bits and pieces of the law that will have escaped purview and become law wrongly because of the hurried legislative action necessary to have effected passage, but again, on balance cutting taxes is a worthy enterprise. Can it have been made better? Absolutely; but in this case, we’ve not allowed the perfect to destroy the very good.”
As a result of the Tax Bill, AT&T said, “Following Congressional approval of the GOP tax reform plan, AT&T announces its intention to boost capital spending in the U.S. by $1B in 2018, and pay a $1K special bonus to more than 200K domestic employees.” Yesterday’s FedEx positive statement about earnings was also enlightening. Yet, because of legislative issues, President Trump probably will not sign the tax bill until the new year in order to prevent spending cuts from appearing until 2019. That said, short-term traders will likely sell stocks on the news, which is what has happened the past few sessions, but while most of the major indices closed lower yesterday, there were actually more advancing than declining issues on the NYSE, as well as four times more 52-week highs than lows (a tip of the hat to Jason Goepfert). This morning, all is quiet on the western front with no real overnight news, leaving the preopening futures relatively flat as we write at 4:45. We continue to think stocks trade higher with the “tell” by the D-J Transports being up ~1.00% yesterday while the FANGs lost 0.7%.

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