Markets, Tax Cuts, a Tale of Two Cities… and Politico?

The hope of tax reform. It’s what I’ve been telling you, as well as telling readers of my Successful Investing newsletter, has been the key to this market rally since November 9, 2016.

That, of course, is the day after Donald Trump was elected president. And ever since then, markets have rocketed higher on the hope that President Trump and a Republican Congress could put in place key elements of the pro-growth economic agenda he told America he wanted to enact.

That agenda is comprised of regulatory rollback, Obamacare repeal-replace, tax reform that includes a reduction in the corporate tax rate and a foreign profit repatriation holiday. And while there has been regulatory rollback, there was no Obamacare repeal and replace.

Last week, the remaining leg of the pro-growth agenda — corporate tax cuts and a repatriation holiday — appeared to be in serious trouble.

The reason why had a lot to do with the reaction to President Trump’s stunning remarks regarding the deadly violence in Charlottesville, Virginia. Recall that last week, I mentioned that the president’s “both sides to blame” comments about the violence had alienated key members of his own party, and especially key members in Congress that he needs to help pass tax reform legislation.

Apparently, the comments also roiled the president’s key economic advisor, Gary Cohn.

According to multiple news reports, Mr. Cohn was “upset” and “disgusted” with the president’s response to the violence in Charlottesville, and was actually considering leaving the administration because of it.

That news last Thursday resulted in the biggest one-day decline in markets in months, as stocks sank nearly 2% across the board. Now, it’s not that Wall Street necessarily loves Gary Cohn, although he is trusted and respected by the Wall Street elite. The bigger issue is that Mr. Cohn’s departure would be interpreted as a true tax reform killer. And if tax reform is dead, then so too is the Trump bull market.

Fortunately, this tale-of-two-cities drama took a bullish turn this week, and it did so thanks to a story that appeared on the Washington-insider website Politico.

The article implied there was substantial progress being made on corporate and personal tax reforms, which served to reverse the decline in stocks resulting from the Cohn resignation rumor. And given the absence of any other material catalysts on Tuesday, stocks rallied on that report.

The bottom line here is that these two extreme days in markets were prompted by separate media reports regarding the fate of tax reform. The negative report of a potential Cohn resignation (which proved untrue) took stocks down hard and fast. Then a positive report on tax reform and the progress made by key administration and Congressional figures sent stocks soaring.

Now, do you have any doubt remaining that what I’ve been telling you about tax reform being the key to this bull market is true?

I should hope not.

In case you missed it, I encourage you to read my e-letter from last week about how President Trump’s remarks on the Charlottesville event hurt his presidency and his pro-growth agenda.

Upcoming Appearances

San Francisco MoneyShow, Aug. 25-26: If you’re in “The City” this weekend, stop by the San Francisco Marriott Marquis and see me, as well as many of the other great industry speakers, at the San Francisco MoneyShow. I will be giving two presentations, the first on Friday, Aug. 25, 2017, 6:00 p.m. – 6:45 p.m., titled: “ETFs and the Music of the Markets.” The second will be Saturday, Aug. 26, 10:45 a.m. – 11:30 a.m., titled, “5 ETFs to Fight the Fake News.” For your complimentary tickets, go to Woods.SanFranciscoMoneyShow.com.

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ETF Talk: Large-Cap Growth Fund with a Low Cost

One of the goals of the giant exchange-traded fund Vanguard Growth ETF (VUG) is, in Vanguard’s own words, “to provide a convenient way to match the performance of many of the nation’s largest growth stocks.”

VUG does so by selecting a group of mostly large-cap, as well as some mid-cap, companies based on six growth factors. They are: expected long-term growth in earnings per share (EPS), expected short-term growth in EPS, three-year historical growth in EPS, three-year historical growth in sales per share, current investment-to-assets ratio and return on assets.

VUG is a massive fund with $27.97 billion in total assets under management and an average daily trading volume of $82.8 million, giving it strong liquidity.

As a result of its focus on growth, VUG is heavily invested in the technology sector (28.23% of fund holdings). In particular, VUG favors the FANG (Facebook, Amazon, Netflix, and Google) stocks, which are four high-performing technology stocks in the market as of 2017. Other sectors the fund focuses on are consumer cyclical, 18.03%, and health care, 14.49%.

Vanguard prides itself on its management efficiency, which it passes down to its investors in the form of a super-low expense ratio of only 0.06% for VUG. This number is 95% lower than the average expense ratio of funds with similar holdings. Overall, this makes VUG a good choice for growth investors seeking inexpensive and diversified exposure.

It is worth noting that, as with all Vanguard funds, VUG’s holdings are disclosed monthly rather than daily. This limits the fund’s transparency and may discourage some sensitive investors.

Top five holdings of the fund are Apple (AAPL), 6.77%; Amazon.com (AMZN), 3.89%; Facebook (FB), 3.88%; Alphabet Inc. A (GOOGL), 2.73%; and Alphabet Inc. C (GOOG), 2.66%.

For those who are looking for future growth, the Vanguard Growth ETF (VUG) may be worth adding to your portfolio.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

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Bierce on Oceans and Irony

“Ocean: A body of water occupying about two-thirds of a world made for man — who has no gills.”
— Ambrose Bierce

The irony of nature is all around us. As the great Ambrose Bierce reminds us, we live on a planet that’s mostly water, yet we can’t drink that water, nor can we breathe it. It’s the same situation with much of life. Man has limited resources, limited time and limited energy. Yet for most of us, we want to do it all. Given the finite nature of the time we have on this ocean-dominated planet, doesn’t it just make sense to live life to the fullest, and to maximize the truly important aspects of life such as love, relationships, productive achievement, helping our fellow man and creating financial stability for ourselves? I certainly think so.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Jim.

In the name of the best within us,

Jim Woods
Editor, Successful ETF Investing