The Markets
 
There was a lot to be thankful for last week.
 
Stock markets around the world may have ripened to full-slip sweetness this year. Emerging markets have delivered the most attractive returns year-to-date. The MSCI Emerging Markets Index was up 34 percent year-to-date, last week. The United States and Europe have marched higher, too. The Standard & Poor’s 500 Index was up about 16 percent year-to-date, while the Euro Stoxx Index was up 11.3 percent, reported Barron’s and The Wall Street Journal.
 
The question is, “Have markets become overripe?’ As you might expect, opinions on the matter vary:
 

• Jim Paulsen, chief investment strategist at the Leuthold Group, told CNBC, “I don't see the elements of a bear market but I certainly think 2018 can bring us a correction or at least just a more challenging market.”

 

• David Lebovitz, global market strategist with J.P. Morgan Asset Management, wrote in Barron’s, “Healthy earnings growth suggests that there is still upside in U.S. equities, but this area of the global equity market is most expensive relative to its long-term average. However, history has shown us that expensive stock markets can get more expensive before they get cheaper, as multiples tend to expand in the final stages of a bull market.”

 

• Peter Boockvar, chief market analyst at the Lindsey Group, told CNBC, “This boat is now standing room only…I still can't figure out why some think there is no euphoria in markets when one has to go back 30 years to see this wide a spread between bulls and bears.”

 
Boockvar was referring to an early November Investors Intelligence Sentiment Survey, which gauges the attitudes of U.S. advisors. CNBC reported 63.5 percent of those surveyed were bullish and just 14.4 percent were bearish. A gap of 30 points is a sign of elevated risk, while a 40-point difference suggests defensive measures may be appropriate.
 
Individual investors aren’t quite as confident. Last week’s AAII Sentiment Survey showed 35.5 percent were bullish, 29 percent were bearish, and the remainder were neutral. It’s important to note, there was a distinct shift toward bullishness and away from bearishness in last week’s survey.

The Markets
 
Are investors more like tigers or African wild dogs?
 
It appears investors – retail and institutional – have become rather like predators. They patiently stalk shares, waiting for a dip, and then they strike – buying stocks when prices fall.
 
Consider last week. Barron’s described it like this: “The Dow traded down nearly 80 points on Monday, 170 points on Tuesday, and 170 points on Wednesday, but each time the blue-chip benchmark finished off its lows. That was followed by the Dow’s 187-point rally on Thursday, as everyone bought the dips.”
 
Investors’ remarkable behavior led the publication to speculate, “What if higher volatility, instead of scaring investors away from the stock market, brings them in? In that case, this bull market could still have a long way to go.”
 
Buying low and selling high is a foundational principle of investing. However, it remains to be seen how successful buying dips will prove to be in a market that some believe is too highly valued.
 
One measure of valuation is the 12-month trailing price-to-earnings (P/E) ratio, which tracks a company’s current share price against its earnings during the previous 12 months. Last week, FactSet reported the trailing P/E ratio for the Standard & Poor’s 500 Index was 22. The five-year average is 18.2, and the 10-year average is 16.9. Some prefer to look at forward P/E ratios, which compare share price to expected future earnings. The forward P/E ratio for the Standard & Poor’s 500 Index was 18, while the five-year average is 15.7, and the 10-year average is 14.1.
 
Only time will tell whether investors’ dip buying will more closely resemble the hunts of tigers or those of African wild dogs. When hunting prey, tigers are successful 5 to 10 percent of the time. African wild dogs take down prey 85 percent of the time, according to BBC’s Discover Wildlife.
 
As always, much will depend on the investments selected. 

​The Markets
 
Selling it overseas.
 
Most of the companies in the Standard & Poor’s 500 (S&P 500) Index have reported third quarter earnings per share (EPS), which is the profit earned per share of stock outstanding during the period. Many have done quite well.
 
With more than 90 percent of companies reporting, the total EPS growth rate for the S&P 500 has exceeded expectations, reported FactSet. In aggregate, the growth rate accelerated from 3.1 percent on September 30 to 6.1 percent last week.
 
It’s interesting to note companies that sell more products and services outside the United States experienced significant increases in EPS when compared to companies that sell more at home. S&P 500 companies with:
 

• More than one-half of sales in the United States had an aggregate growth rate of 2.3 percent.
• Less than one-half of sales in the United States had an aggregate growth rate of 13.4 percent.

 
The disparity owed much to the weaker U.S. dollar and faster economic growth in other countries, including emerging markets.
 
Investors weren’t all that appreciative of strong corporate performance. They rewarded positive EPS surprises less than average and penalized negative EPS surprises more than average. On November 10, FactSet explained:
 
“...it may be due to the high valuation of the index relative to recent averages. As of today, the forward 12-month P/E [price-to-earnings] ratio for the S&P 500 is 18.0… Prior to the month of October, the forward 12-month P/E had not been equal to (or above) 18.0 since 2002. Thus, despite the number and magnitude of positive earnings surprises in recent quarters, the market may be reluctant to push valuations even higher in aggregate.”
 
Last week, major U.S. stock indices ended their multi-week winning streaks and finished lower.

The Markets
 
“Taxes are what we pay for a civilized society.”
 
U.S. Supreme Court Justice Oliver Wendell Holmes’s statement is engraved on the front of the Internal Revenue Service building in Washington, D.C. Some people agree with the sentiment. Others believe it to be a logical fallacy.
 
It’s likely the tax plan proposed by House Republicans last week had all of them talking, regardless of position on the opinion spectrum. Some of the changes suggested in the proposal include:
 

• Reducing current marginal income tax brackets from seven to four (12, 25, 35, and 39.6 percent). The New York Times reported, “While the lowest income rate would increase, typical families in the existing 10 percent bracket would most likely be better off because of a larger child tax credit and an increase in the standard deduction.”
• Repealing the Alternative Minimum Tax.
• Increasing the standard deduction to $12,000 for individuals and $24,000 for married couples, while eliminating personal exemptions (the $4,050 exemptions you claim for yourself, your spouse, and your dependents).
• Repealing state and local tax deductions.
• Reducing (and eventually eliminating) estate taxes.
• Setting the corporate tax rate at 20 percent. Financial Times wrote, “This will not increase wages or growth by much, and nowhere near the wild claims made by its proponents. But a lower rate combined with a broader tax base is not a terrible idea…To pay for the cuts, the tax law writers have gone after corporate deductions…”
• Eliminating medical expense deductions. The Hill explained, “Under current law, the IRS allows individuals to deduct qualified medical expenses that exceed 10 percent of a person’s adjusted gross income for the year. The bill would repeal that itemized deduction, effective in 2018.”

 
In addition to headline news about tax reform, investors contemplated the appointment of Jerome Powell as the next Chair of the Federal Reserve and embraced strong earnings. The Standard & Poor’s 500 Index, Dow Jones Industrial Average, and NASDAQ closed at record highs last week.