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Stocks Break Record On Trump Tax Reform Hopes, As Fitch Issues Warning

This week's economic news for long-term investors was overshadowed by remarks made Thursday by President Donald Trump that boosted optimism about a tax cut for corporations.

"Lowering the overall tax burden on American businesses big league - that's coming along very well," said Mr. Trump, speaking at a White House meeting with executives from the aviation industry. "Way ahead of schedule, I believe. And we're going to be announcing something, I would say, over the next two or three weeks that will be phenomenal in terms of tax, and developing our aviation infrastructure."

Meanwhile, new data reported by the Labor Department Tuesday showed monthly job openings were at 5.5 million at the end of December. For several months, this report has essentially been flat, and last week the government said new job openings had hit a new record high. These reports may be a signaling that the economy is approaching full employment and that the job market is tightening.

When people are willing to quit their job, it means they are confident of finding better jobs, and that's what's been happening, according to the latest from the U.S. Department of Labor. While the quit rate declined slightly in December, it remained near the high levels last achieved a decade earlier, in the last economic expansion.

Consumer sentiment has returned to normal following the recession and financial crisis of 2008. This data series, which runs through the end of January, comes from the University of Michigan, and has been published monthly since 1960. It doesn't tell you about the future, and is a lagging indicator. However, it has been useful in the past in spotting periods of irrational exuberance, like was last seen during the tech-stock bubble of 2000. In contrast, consumer sentiment is good but not at a level in which investors are likely to drive the price of stocks irrationally higher or overpaying for assets and underestimating their risks.

While the promise of a corporate income tax cut and all the good economic news has helped send the stock market to record highs repeatedly since the election of Mr. Trump, no one can predict the future and Mr. Trump is not getting rave reviews from everyone.

Fitch Ratings Inc., which along with Moody's and Standard & Poor's, is designated as a nationally recognized ratings agency by the U.S. Securities & Exchange Commission, issued an unsettling warning that "the Trump Administration represents a risk to international economic conditions and global sovereign credit fundamentals."

"The Administration has abandoned the Trans-Pacific Partnership, confirmed a pending renegotiation of the North American Free Trade Agreement, rebuked US companies that invest abroad, while threatening financial penalties for companies that do so, and accused a number of countries of manipulating exchange rates to the US's disadvantage," Fitch said in a guidance published on Friday. "US policy predictability has diminished, with established international communication channels and relationship norms being set aside and raising the prospect of sudden, unanticipated changes in US policies with potential global implications."

Stock indexes closed at record highs Friday, for the second day in row. A broad rally pushed the Standard & Poor's 500 index up 0.4% to 2,316.

The warning by Fitch about a trade war is a reminder that political, social, and other turmoil - the next new crisis - could send some investors to the sidelines anytime, and a correction of 10% or perhaps 20% is possible at any time, particularly if perceived protectionism by the U.S. results in retaliation by foreign trade partners.

With fake news and alternative facts flourishing, our weekly reports are not intended as advice but to provide prudent analysis about news affecting your wealth over the long run. Please feel free to share our timely weekly reports with your family and friends.

This article was written by a veteran financial journalist based on data compiled and analyzed by independent economist, Fritz Meyer. While these are sources we believe to be reliable, the information is not intended to be used by as financial advice without consulting a professional about your personal situation.

Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss. Past performance is not an indicator of your future results. Investing in foreign securities carries political and currency risks.

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This article was written by a professional financial journalist for The Dover Group and is not intended as legal or investment advice.

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