Market Strategy Radar Screen Weekly December 12, 2016

  This Bull's Got Legs

The most recent rally is just the latest chapter for a bull market that began in March of 2009

And then there was the third week of June when the Brexit referendum with its own cabal of worries and dread surfaced.

Most recently in the first few hours of the election night coverage stateside when the stock market got wind that the outcome was likely to be the one few predicted. The market first headed south (with the Dow Jones Industrials’ futures indicating a drop of some 900 points) before sensing that the surprise winning candidate’s agenda might be good for the economy and stocks, turned 180 degrees north into the rally that now has the venerable Dow Industrial average near the threshold of 20,000.

The question we hear from investors who have missed the equity rally thus far is “how long can this go on?”

We believe it’s a good question and one that is best answered in short form starting with another question: “What got stocks to these levels?”

We think there’s no need to rebrand the rally that has taken stocks to where they closed on Friday. Calling the surge in stocks since the November 8th Presidential election “The Trump Rally” may well identify the most recent cause for the latest move up for the bull market that began in March of 2009 but it’s only the latest chapter to the story of what is one of the greatest (though ironically most disdained) bull markets of the past 30-plus years.

There are key factors that we believe warrant investors’ attention to not underestimate how long the next leg of the bull market could run (notwithstanding catalyst-driven pullbacks that are likely to emerge at points along the way) to a goal as of yet envisioned by investors.

We consider a confluence of factors which have brought the markets to where they closed last Friday from the depths of the lows in March of 2009. These include:

• Monetary policy stateside and foreign;
• Globalization;
• Technology;
• Improved economic fundamentals stateside and internationally;
• Modest but not robust growth in the US;
• Foreign central bank activity;
• A recent improvement in corporate earnings stateside;
• Management decisions to deploy buybacks as opposed to expanding capacity during periods of significantly challenged growth.
• Persistent negative sentiment and projection from many corners of the economy and market which has kept optimists and bulls humble;
• Positive sentiment supported by improved and so far sustainable economic growth which has repeatedly debunked negative projections;
• Disinflation being more of the problem stateside rather than deflation;
• Demand for yield via fixed income which along with moderate growth and data dependent monetary policy has kept yields low and debt affordable;
• A fresh kept memory of the tech bubble and real estate bubbles that has helped keep animal spirits in check and kept irrational exuberance from distorting valuations in the equity market;
• No recession stateside since the December 2007-August 2009 slump ended;
• Black Swan vigilantism;
• Expected post Presidential election stimulus agenda.

All of the above as well as a degree of restraint surrounding the equity markets have helped keep the bull market determinedly climbing the proverbial wall of worry, notwithstanding a few detours along the way. It leads us to believe once again that “this bull’s got legs and knows how to use them.”

This week:

We expect the Fed’s FOMC meeting, which runs from Tuesday to Wednesday, will capture much though not all of the market’s attention this week as economic data continues to cross the transom and the progress of choosing cabinet members and other staffing and agency appointments emanates from the offices of the President-elect and his staff.

We look for the Fed to raise its benchmark rate by 25 basis points. An increase of that size in the benchmark rate is likely to be welcomed by the markets and could inspire a modest rally in the 3 bond market from what we believe are still oversold conditions.

The dollar, which has persistently maintained and even added strength since the election, could ease lower. The dollar historically has been known to strengthen ahead of Fed tightening and then move lower after the Fed takes action.

We continue to favor cyclical sectors over defensives and remain market cap agnostic (opting for broad exposure over large, mid and small cap stocks) in an environment where risk in much of fixed income appears greater than that which appears in the equity market near term as the process of interest rate normalization moves ahead and the economy grows at a sustainable but moderate pace.

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