Trader Talk

The markets in January: What's next?

Closing Bell Exchange: Markets running on their own

The markets in January: What's next?

Forget about Dow 20,000 — for the moment. Forget about the lack of leadership, the lack of volume. The trading community is focused on what will drive markets higher in 2017 — and what speed bumps will occur along the way.

Two topics dominate the conversation:

1) Will consumer confidence remain high and, specifically, will the Trump rally translate into more consumer spending?

2) How much will expectations for tax cuts and fiscal stimulus impact earnings in 2017 and 2018?

Rather than "bulls vs. bears," I've recently suggested that these issues should be framed as a debate between "pragmatists" and "optimists."

The pragmatists insist that:

1) Investors are wildly optimistic about translating improving sentiment and tax cuts/infrastructure programs into improved consumer spending and higher earnings.

2) Investors are not only pricing in higher earnings, they are also pricing in a large-scale global reflation that is unlikely to occur.

The pragmatists certainly have some support in the trading of global equities. While U.S. equities have rallied since the election, European equities have been flat, and emerging markets have generally been down, including China.

The optimists insist that:

1) Consumer sentiment/business sentiment surveys are already improving. The recent National Federation of Independent Business survey, for example, found dramatically different attitudes among small business owners before and after the election. Optimists say that will soon translate into more business spending.

2) Even modest tax cuts could increase earnings 10 percent or more. I looked at some early predictions here. Optimists say that because of the boost from tax cuts, stocks are not wildly overpriced. The S&P 500 is currently trading at roughly 17 times estimated 2017 earnings. These estimates were done before analysts factored in any effect from tax cuts. That's slightly on the high side, but optimists also argue that a multiple expansion is justified, because earnings are going to expand.

Who's right? I'll give you my thoughts tomorrow morning.