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Index Month / Year to Date

Dow Jones +1.89%/+13.36%
S&P 500 +1.73%/+12.53%
NASDAQ +0.94%/+20.67
10-yr Treasury yield was 2.16% at the end of August and 2.33% at the end of September

Source: Bloomberg.com


Gains in technology stocks drove the S&P 500 to another record high on the last day of trading in September, although the Dow fell slightly. While it was another relatively calm month for the markets, we did see signs of nervousness creep in over everything from escalating tensions with North Korea to another Federal Reserve meeting.

For the most part, though, big investors continued clinging to their optimism over Donald Trump’s tax plan and his ability to push it through Congress. This optimism has been tenacious ever since the election, creating what seems to be a “froth” (of about 20 percent) on top of what was already an overvalued market. As we’ve pointed out previously, sustaining that froth may now depend on the approval of Trump’s tax plan, or at least the part of it that aims to cut the corporate tax rate from 35 percent to 20 percent.

“For the market, the most important thing is tax cuts for the corporations,” said First Standard National economist Peter Cardillo. “But, any disappointment going forward would certainly take the wind out of this market as it has rallied on hopes of cuts.”1

As we’ve also pointed out many times in recent months, there are a number of other factors that could potentially “take the wind” out of this rally or even usher in the next major market correction. If Trump’s tax plan is approved, for example, many economists are convinced it will add to our already mammoth national debt, which surpassed the $20 trillion milestone in September.2

North Korea is another possible tipping point should the war of words between Trump and Kim Jong-un escalate to military action. Another important point is the potential market impact of the Fed’s efforts to “unwind” quantitative easing and drive up long-term interest rates by selling back the $4.5 trillion in U.S. treasuries it purchased. The process is scheduled to begin this month, and it may have the potential to deflate the markets regardless of whether the Fed’s efforts succeed or fail.

Last month, we likened the stock market to a floating balloon in search of a pin to land on, and none of those “pins” have since disappeared. Thus, this is probably not only a good time for investors already focused on safety and income to stay the course, but also a good time for those who haven’t yet reduced their market risk to do so while they can still “sell high.”

1 “US STOCKS-Technology Stocks Drive S&P to Record High,” Yahoo Finance, last modified September 29, 2017

2 John Bat, “National Debt Hits Historic $20 Trillion Mark,” CBS News, last modified September 11, 2017

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