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Stocks continued to reach new highs on optimism that the U.S. economy will accelerate next year. November’s rally was pushed higher on account of investor confidence that the U.S. government would pass a version of the Trump tax reforms. On top of the anticipated marginal stimulus that the bill would provide to the economy, the stock market is euphoric over proposed cuts in corporate income taxes. With the corporate tax rate likely falling from 35% to 22%, many S&P 500 companies would see bumps to their earnings in 2018. While Trump and the Republican-led Congress/Senate have failed to deliver on many of their election promises, investors are confident that the G.O.P. can rally around tax cuts (despite the potential impact on the U.S. deficit and debt). While we acknowledge that corporate tax cuts will provide a lift to 2018 earnings, we believe that the market has already priced most of this in. With the U.S. stock market up about 30% since Trump’s election, most of this good news is baked into the markets. We continue to focus on the fundamentals: elevated stock valuations; rising short term interest rates; extreme investor bullishness; liquidity concerns (caused by central banks unwinding quantitative easing); high corporate and government debt levels; and record low volatility. The bottom line is THAT FUNDAMENTALS MATTER and while the market may continue to go up in the short term, valuations and fundamentals will eventually catch up to stocks. Just like in 2000 and 2007 when speculators ignored dotcom valuations and U.S. housing statistics, investors who were patient and disciplined were ultimately rewarded. With this in mind, we continue to structure our portfolios defensively and prudently. (more…)