One of the primary objectives of my oftentimes meandering morning market missive is to stay on top of what is driving the market action. So, one of my New Year's resolutions is to commit at least one post a week to either the short-, intermediate-, or long-term drivers. So, this morning, I thought I'd run through what I believe is behind the most recent joyride to the upside in the stock market.

While I will likely be hit with a Captain Obvious tag here, I believe the primary driver to the market action is related to the ongoing discounting of the tax reform bill's impact on both earnings and economic growth.

The key point here is that everybody on the planet is busy trying to figure out how much better things are going to be in the future thanks to the tax bill. Economists. Wall Street analysts. Government officials. CEO's. They are all looking ahead to what most believe will be greener pastures.

The IMF was the latest to get into the act. This week the organization focused on global monetary cooperation upped it's growth forecasts for both 2018 and 2019 in response to, yep, you guessed it; the anticipated impact of the tax bill.

In its World Economic Outlook report, the IMF increased its growth forecast for world economies this year and next by 0.2% each. "The revision reflects increased global growth momentum and the expected impact of the recently approved U.S. tax policy changes," the IMF wrote.

The report went on to say, "The effect on U.S. growth is estimated to be positive through 2020, cumulating to 1.2% through that year, with a range of uncertainty around this central scenario."

On Monday, IMF Managing Director Christine Lagarde summed up what is being referred to as synchronized global growth by saying, "Global growth has been accelerating since 2016 and all signs point to a continuous strengthening of that growth this year and next year."

So there you have it; from my seat, the stock market continues to discount future growth. Simple, right?

The question, of course, is how "much" discounting to the upside still needs to be done? I.E. How much is enough? How far can the current rally go until future growth expectations are "baked in?"

The problem is we are dealing with a complete unknown here. Sure, analysts can take a look at a company, factor in the new tax bracket, and come up with a revised earnings forecast. From there, a multiple can be applied and voila - you've got yourself a new price target for the stock.

But what can't be known is the impact of the improving economic conditions around the globe. This is basically guesswork at this stage of the game.

So... the bottom line is the market is currently in the process of discounting future expectations. Here's to hoping Wall Street doesn't overdo it. But that never happens, right?

Thought For The Day:

It isn't what we don't know that gives us trouble, it's what we know that ain't so. -Will Rogers

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Heritage Capital Research
Serving Financial Advisors since 1989
Serving individual investors since 1980
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Disclosure: At the time of publication, Mr. Moenning held long positions in the following securities mentioned: none.

Note that positions may change at any time.

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The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

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