By Sue Chang, MarketWatch
North Korea and tax reform remain on radar
As the Federal Reserve prepares to shut down the nearly
decadelong quantitative-easing program and President Trump ramps up
pressure on North Korea, some analysts are heralding the dawn of a
new era where investors will have to grapple with unknown risks and
uncertain rewards.
"Even though the Federal Reserve already started raising
interest rates slowly, the unwind of the balance sheet marks the
start of a new postcrisis era," said Bill Stone, global chief
investment strategist at PNC Asset Management Group.
In the months following the U.S. financial crisis that saw the
demise of storied Wall Street banks, the Fed pumped trillions of
dollars in financial support into the economy that was instrumental
in stabilizing the financial markets.
On Wednesday, Chairwoman Janet Yellen announced the Fed will
begin to unwind its gargantuan balance sheet
(http://www.marketwatch.com/story/still-on-course-fed-signals-one-more-rate-hike-in-2017-2017-09-20)
starting in October.
"With the Fed's balance sheet growing from about $1 trillion in
2008 to $4.5 trillion now, this is a significant step to step away
from the accommodation in the wake of the Great Recession and
financial crisis," said Stone.
Now investors must navigate a stock market where easy money is
no longer the rule even as geopolitical uncertainties loom
large.
Read:Key lessons from the second-longest bull market, in 11
charts
(http://www.marketwatch.com/story/key-lessons-from-the-second-longest-bull-market-in-11-charts-2017-09-20)
That may mean that the halcyon trading that has dominated the
market this year is likely to be a thing of the past as central
banks' loose monetary policies were largely credited with muting
volatility in risk assets such as stocks, according to Stone.
Data show that 2017 has been the least turbulent year for the
stock market in over 50 years with the CBOE Volatility Index
hovering near all-time lows.
Even so, the Fed's move to trim its balance sheet may not be the
death knell for the bull market that some fear.
Richard Hastings, macro strategist at Seaport Global Securities
LLC, stressed that the Fed will be cautious in its tightening
cycle, partly to support reconstruction of the states affected by
the recent hurricanes.
"All of that means is a slightly weaker U.S. dollar and better
revenue translations for U.S. stocks that sell overseas," he
said.
Investors are also learning to live with North Korea's
sabre-rattling as Trump and Kim Jong Un continue to trade insults
and threats.
At the United Nations General Assembly this week, Trump
reiterated his hard stance on North Korea, warning that he will
"totally destroy" the country
(http://blogs.marketwatch.com/capitolreport/2017/09/19/president-donald-trump-speaks-to-the-united-nations-live-blog-and-video/)
if it continues on its belligerent path. "Rocket Man is on a
suicide mission for himself and for his regime," said Trump.
Pyongyang responded by threatening to conduct a nuclear test of
"unprecedented scale" by testing a hydrogen bomb over the Pacific
Ocean.
Like most things about North Korea, it is unclear how far Kim is
willing to go to defy the international community to fulfill his
nuclear ambitions and this unpredictability is what makes North
Korea such an enigma both in politics and in investing.
See also: Kim Jong Un calls Trump 'mentally deranged' and a
'dotard,' setting off scramble for dictionaries
(http://www.marketwatch.com/story/kim-jong-un-calls-trump-mentally-deranged-us-dotard-setting-off-scramble-for-dictionaries-2017-09-21)
"It all comes down to one question in my opinion: Is Kim Jong Un
homicidal or suicidal? If you think he [is] only homicidal, carry
on. If you think he [is] suicidal and has no goals other than to
blow things up, then prepare for a major catastrophe," said Ian
Winer, head of the equities division at Wedbush Securities, who
predicted a 10% to 15% plunge in the latter scenario.
To be sure, the market has remained fairly stoic despite the
escalating tensions, which Hastings credits partly to the fact that
North Korea is largely a mystery for Wall Street.
"The situation with North Korea cannot be priced-in because it
is too external to fundamentals and economics. So the market and
institutional investors just ignore it," he said.
Against the backdrop of a tighter monetary policy and tensions
with North Korea, investors will also look to Congress for elusive
tax reforms, which are the centerpiece of Trump's pro-business
agenda.
Senate Republicans are considering drafting a budget that would
allow up to $1.5 trillion in tax cuts
(http://www.marketwatch.com/story/senate-republicans-considering-budget-allowing-for-up-to-15-trillion-in-tax-cuts-2017-09-19)
over the next decade, according to The Wall Street Journal this
week. Budget talks are still in progress.
The impact of tax cuts on the market are hard to gauge given the
dearth of details and Morgan Stanley does not expect any tax
reforms until next year.
"We're skeptical of bipartisanship and fourth quarter is a
logjam, but tax reform should make slow progress toward 2018
passage even as failure risks remain. Deficit expansion is part of
the deal, but limited in scope and stimulus. Yet this may be enough
for risk assets near term," according to a team of strategists led
by Michael Zezas.
The S&P 500 closed up 1.62 points at 2,502.2, notching a
weekly gain of less than 0.1%. The Dow Jones Industrial Average
ended down 9.64 points, or less than 0.1%, to 22,349.59. The
average eked out a weekly gain of 0.4%.
The Nasdaq closed up 4.23 points, or less than 0.1%, to 6,426.9,
but ended the week slightly lower.
Read Market Snapshot: Dow, S&P 500 eke out small gains, post
second weekly advance
(http://www.marketwatch.com/story/us-stock-futures-fall-after-north-korean-nuclear-bomb-threat-2017-09-22)
(END) Dow Jones Newswires
September 23, 2017 08:01 ET (12:01 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.