Wall St Week Ahead-Fear of missing out keeps investors in stocks despite risks

Hennessy Advisors

01/12/2017 21:16

By David Randall 
    NEW YORK, Dec 1, (Reuters) - Wall Street's fear of missing 
out on a relentless rally appears to be trumping rising 
political risk in a high-stakes December in Washington.  
    The ticking clock on the Republican Party's efforts to cut 
corporate taxes, alongside the risk that the U.S. government may 
shut down if a budget deal isn't reached by December 8, is 
increasing the levels of political risk for investors - but they 
have yet to really react. 
    "Right now the market is assuming that everything will work 
out, but you've got a tremendous number of moving parts," said 
Phil Orlando, chief equity market strategist at Federated 
Investors  FII.N  in New York. 
    Alongside the back-and-forth on taxes, Wall Street will be 
watching a Dec. 8 expiration date for funding needed to keep the 
U.S. government open alongside the deadline when the U.S. 
Treasury hits its limit on borrowing; as well as a Dec. 12 
Special U.S. Senate election in Alabama.  urn:newsml:reuters.com:*:nL1N1NY1PK 
    On Tuesday, President Donald Trump warned on Twitter that "I 
don't see a deal" to keep the government open and work past Dec. 
8, although the White House said Wednesday it did not see such 
an eventuality.  urn:newsml:reuters.com:*:nL1N1NZ1ZZ  
    Typically, the threat of a government shutdown alone would 
prompt fund managers to move more of their assets into cash. The 
benchmark S&P 500 lost 2.6 percent in the eight trading days 
before the last government shutdown in 2013, and has declined an 
average of 0.6 percent during government shutdowns overall, 
according to LPL Financial. Debt limit concerns are likely to be 
put off until 2018 as the U.S. Treasury is expected to take 
steps to postpone any need for action by Congress.  urn:newsml:reuters.com:*:nL1N1NY1PK 
    Yet with the benchmark S&P 500 up nearly 18 percent for the 
year to date, some portfolio managers see a greater risk in 
stepping to the sidelines. Throughout the year, the stock market 
has rallied in the face of standoffs ranging from increasing 
tensions in North Korea to former FBI director's James Comey's 
testimony to Congress that President Trump fired him to 
undermine the agency's Russia investigation. 
    On Friday, stocks sold off on a report that former national 
security adviser Michael Flynn was prepared to tell 
investigators that before taking office Trump had directed him 
to make contact with Russians. However, shares quickly pared 
those losses.  
    Despite his skepticism, Orlando has yet to move more of his 
assets to cash, in large part because corporate earnings keep 
rising and should continue to do so even if a tax package is not 
signed, he said.  
    If the tax bill fails, Orlando said he expected the S&P 500 
to fall by as much as 10 percent. He would be a buyer in that 
case, he said, because he expected the S&P 500 to reach 3000 
within the next 18 months.   
     
    CROWDED CALENDAR 
    Brian Peery, a portfolio manager at Novato, California-based 
Hennessy Funds  HNNA.O , said a government shutdown or the tax 
bill failing would prompt a swift sell-off, but that rising 
consumer confidence would ultimately continue to push the market 
higher over the next year.  
    "If I'm looking at a 10 percent correction, I'm a buyer," he 
said.  
    The inaction is not limited to the stock market.  
    Christopher Ryon, a municipal bond fund manager at Santa Fe, 
New Mexico-based Thornburg Investment Management, said that the 
Republican tax bill could reduce the size of the municipal bond 
market by 25 to 30 percent by limiting the ability of stadiums, 
airports and privately-financed toll roads to qualify for 
tax-exempt status.  
    At the same time, there could be an increased demand for 
municipal bonds if residents of high-tax states are no longer 
able to deduct their full state and local property taxes, 
leaving tax-free municipal bonds as one of the few ways wealthy 
investors can reduce their taxable incomes.  
    As a result, Ryon is largely sitting on his hands, ignoring 
both lower-rated bonds that have rallied as investors have 
reached for yield and triple A rated bonds that look "on the 
rich side," he said.  
    "There are a whole lot of unintended consequences attached 
to this  tax  legislation," Ryon said. "This is going to be an 
interesting couple of weeks where we will really see how the 
sausage gets made." 
 
 (Reporting by David Randall; Editing by Andrew Hay) 
 ((David.Randall@thomsonreuters.com; 646-223-6607; Reuters 
Messaging: david.randall.thomsonreuters.com@reuters.net)) 
  
((Wall St Week Ahead runs every Friday. 
For the daily stock market report, please click  .N )) 
 
Keywords: USA STOCKS/WEEKAHEAD