The First Days Are the Hardest Ones
By John Stoltzfus,
Chief Investment Strategist
Something’s Happening Here
What it is ain’t exactly clear
We’ll take the markets’ latest set of record highs as confirmation that things are getting better rather than a sign of an imminent market top.
Two back-to-back record highs for the S&P 500 last week came at least in part on increased expectations by market participants that the new administration will provide details on its plans for tax reform sooner rather than later.
The move took the benchmark above and beyond our 2300 target price for 2016 last Thursday as it advanced to close at 2307.87.
On Friday, investors pushed the index to its second record high for the week as it closed at 2316.10.
While a number of market skeptics and bearish pundits intimated that the S&P 500’s latest series of record highs point to an aging of the bull market and pointed to even the likelihood of its not too distant demise, we beg to differ.
For one we’d say, there is no time stamp expiry date that comes with the inception of a bull market. Bull markets are in our experience initiated by oversold conditions that lead to liquidity infusions by the Fed followed by rebounds in stock prices that are supported by economic recoveries that show evidence of sustainability that feed into corporate revenues and earnings making stocks attractive to investors.
The length of the current bull market as well has been aided and abetted by unprecedented and highly favorable monetary policy.
Furthermore as a result of the US Presidential election the bull market now appears on the verge of finding a renewal on its “lease” for further upside via fiscal policy that could see that “lease” extended even further into the visible horizon.
From our perch on the market strategy radar screen, last week’s back to back new record highs for the S&P 500 were driven and supported by the continued flow of positive economic data and the recent improvement in revenues and earnings reported in the current and prior reporting seasons for companies that are members of the broad market index.
While the election of Donald Trump to the Presidency and the possibility that his progrowth agenda will find support from enough members on both sides of the political aisle has provided more than a little “wind under the wings” of this latest chapter in rising stock prices, we believe it is improving fundamentals in the US as well as in much of the rest of the world that has carried stocks higher.
Consider that even as stocks rose after the US election, foreign stocks have been on a relative tear since the start of the year.
While the S&P 500, the S&P 400, the Russell 2000 and the NASDAQ have posted respective gains of 3.5%, 3.6%, 2.3% and 6.5% since the start of the year, the MSCI EAFE index (developed markets ex-US and Canada) has advanced 3.4%, while the MSCI Emerging Markets and the MSCI Frontier markets have jumped 7.9% and 7.2% respectively.
A combination of improved economics, relative valuations to bonds and prospects for earnings growth appear to be working their “mojo” on equity prices.
As to the market crossing 2300 on Thursday (just a little over a-month-and-a-week too late for a “bulls eye” on our year-end 2016 target price for the S&P 500), we’ll accept its tardiness in arriving gladly and chalk it up to another occurrence of “investor patience being rewarded” in the process of the great recovery market that emanated from the depths of the financial crisis of 2008.
Beyond the S&P 500’s two record closing prices last week, we would note new record highs posted by the Dow Jones Industrial Average, the NASDAQ Composite, the S&P 400 (Mid Cap) and the Russell 2000 (small caps). The S&P 600 wasn’t in the record high “winners’ circle” last week as investors continued to show their preference for the broader lower quality small cap benchmark (the Russell 2000 index) that they’ve rotated towards since the start of the year.
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