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Where are the markets going?  Was there the proverbial “buy on rumor and sell on fact” as now most will become focused upon transforming Trump’s words into action and policies?  Will the averages be spooked if there is a delay in confirmations?

As noted yesterday, small business optimism increased by the greatest amount since 1980 and the index is at the highest level since December 2004.  The reason for this surge…potential tax and regulatory reform.

Equities were posting a nominal advance until President Trump made the comment of “bidding out drugs” to get the best possible price.  Drug and biotech shares fell on this statement.  The press conference then became dominated by the Buzz Feed allegations, allegations that he vehemently denied.

I reiterate if there are delays in the formulation and implementation of The President’s tax and regulatory reforms, the averages will suffer.  What are the odds?  Many are focused on the confirmation hearings.  According to Bloomberg, since 1796 there have been approximately 770 nominees for cabinet positions.  Only nine have been rejected, four of the rejections occurred during the Tyler Administration over 150 years ago.  Against this backdrop, the odds are very low that Trump’s picks will not be confirmed.

Many have become fixated on Dow 20,000. I think it is only a number that is only great for headlines and has little significance.

What I do think is significant is if the 10-year Treasury crosses 3.0%.  This is around the level where QE2 commenced.  Interest rates are the largest component of valuation formulas and a rise to this level will negatively impact the largest capitalized momentum growth issues and the income alternative stocks such as utilities and consumer nondurables.

I think the odds are around 75% yields will reach this level because of regulatory and tax reform amplified by an increase in monetary velocity or the turnover of money that will cause growth to exceed expectations.

Such an environment is conducive to the small and value stocks but is negative for yesterday’s must own issues.

Radical thought?  I think the 22% rise in the small and value shares are a harbinger of things to come and such are in a nascent recovery.

Last night the foreign markets were down.  London was down 0.03%, Paris down 0.01%, and Frankfurt down 0.40%.  China was down 0.87%, Japan down 1.19%and Hang Sang down 0.46%.

The Dow should open  The 10-year is

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.