As I watched the markets “crash” overnight, I was reminded of the Interactive Broker’s commercial that is the picture in this blog post. It features a woman sitting down to a dinner date saying, “Markets are a mess, everybody’s selling…wow the market’s already down 2%, I’m sorry I need to do some hedging trades!”
I was thankful that the market was closed during the election because by the time 9:30 rolled around, what looked like a bloodbath at midnight ended up being a flat open.
SO…with that said, the first (and main) thing I want to point out about the election is a question. It’s not a question that asks who you voted for, who you wanted to win, what you think about the election or even one that asks you where you think we are heading….
It’s a very simple and personal question.
Did your goals and objectives change overnight?
I’m guessing no. And that’s why no one should really be doing any selling as a result of the election outcome.
Buying – now that’s a different story. Why? One-word answer – taxes.
It’s not my intention to do an autopsy on the election or to engage in debate about the benefits of one candidate over another. That’s not what I do.
I look at facts, possibilities and probabilities while overlaying them with my opinion. So here’s what I think in a nutshell.
Like it or hate it, the Republicans kept the House, the Senate and won the White House. I think that means there will be a very high probability of comprehensive tax reform and at the top of the list will be President-elect Trump’s desire to lower the corporate tax rate from 35% to 20%.
Even the most watered down tax reform will have this item at the top of the list – and for the record, I believe the Republicans will pass much more than a basic, watered down tax reform package.
A reduction of taxes will flow right down to the bottom line to profits of all companies probably to the tune of a 20% increase in after-tax profits. Make no mistake about it…that is massive. Dare I say…huge.
With the current forward P/E ratio of the S&P 500 hovering around 16.3 (as of the end of the 3rd quarter) and the 25-year average for that P/E ratio of 15.9, any increase in earnings is going to make that P/E ratio go DOWN, which means stocks will look cheap at their current prices.
This will translate into stocks going up.
I believe that if President-elect Trump’s tax overhaul plan is put into place, we can see the equity markets continue to increase for years. That does not even factor in what will happen if a tax overhaul will include the repatriation of corporate profits currently being held overseas.
That makes now the time for long-term investors to consider investing cash…not raising it. Especially if your lifetime goals and objectives did not change in your sleep.
Remember, over the long-term, the fundamentals have historically dictated the direction of the market…and today, regardless of your emotions surrounding the outcome of the election, the fundamentals are favorable.
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