You don’t often catch President Donald Trump in an understatement, but there it was, on Feb. 16, at 3:34 a.m., in—what else—a tweet: “Stock market hits new high with longest winning streak in decades. Great level of confidence and optimism—even before tax plan rollout!”
It...
You don’t often catch President Donald Trump in an understatement, but there it was, on Feb. 16, at 3:34 a.m., in—what else—a tweet: “Stock market hits new high with longest winning streak in decades. Great level of confidence and optimism—even before tax plan rollout!”
It was his first tweet of the night, and maybe the president hadn’t warmed up sufficiently, because how does that do justice to all the amazing feats our stock market is pulling off? Last week alone, the Dow Jones Industrial Average and the Standard & Poor’s 500 index both snagged their 9th record close of 2017, the Nasdaq Composite its 18th, and the Russell 2000 index its fourth. Even B-list benchmarks like the Dow Jones Transportation Average and the Dow Jones U.S. Total Stock Market Index, and global ones like the MSCI World index, all made record highs. The S&P 500 has gone 89 sessions without a 1% decline. TV anchors who had just gushed about Dow 20,000 now must work up new enthusiasm for Dow 21,000. Headline writers groping for superlatives are really, really exhausted.
This time last year, deflation fears pummeled stocks, and yields on nearly a third of Earth’s government bonds were about to plumb fresh hell below zero. Since then, however, crude oil has more than doubled, and copper has rebounded some 40%. Financial stocks have gained 53%; Goldman Sachs Group (ticker: GS) shares are up 79%, Apple (AAPL), 50%.
Unless you’re a masoch*st, you won’t short a market gleefully making serial new highs out of what Aretha Franklin calls R-E-S-P-E-C-T. The Nasdaq’s 18 record closes have already surpassed 2016’s total and are its most since 1999’s 61 record closes. But like elevators and hemline fads, what goes up in the stock market must eventually come down, and some traders say they’re starting to take some profits and wait for better buying opportunities.
Nicholas Colas, Convergex’s chief market strategist, asked the firm’s traders to complete this statement: In order to stay long U.S. equities, you have to believe...what? Here are some answers: Trump’s recent troubles are just the typical pains of any new administration. The Federal Reserve hikes rates twice, not three times, in 2017, and the yield on 10-year Treasuries stays at or below 3%. Oil prices remain stable. The Street, for once, is too pessimistic on earnings, but since analysts already forecast profit growth of 10.5% in 2017 and 11.7% in 2018, lower taxes must goose growth.
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To this list, Colas added the following: Trump doesn’t introduce overtly protectionist policies. U.S. growth stays in the 2%-3% range until Trump’s economic agenda passes Congress. And no geopolitical event either increases global energy prices or dampens U.S. consumer confidence. “But you get the idea,” he says. “A lot has to go right, and not much can go wrong. But that’s what equity prices discount at the moment.”
Stocks, of course, didn’t reach this summit without trusty Sherpas: Global growth is improving, and Treasury yields had stopped sliding. Trillions printed by central banks that had enriched Wall Street are finally trickling down to Main Street—47% of workers say now’s a good time to find a quality job, up from 19% in 2012, says Gallup. After years of cheering every lousy economic report, because they prolong the narcotic drip of monetary medicine, stocks are finally looking beyond Fed support, and even rallying without a corresponding increase in the Fed’s balance sheet.
“The outlook for growth has continued to improve, limiting downside risk,” notes Evercore ISI strategist Dennis DeBusschere. “But valuations are reaching levels that will increasingly be called into question.” Direct sentiment gauges “do not indicate investors are overly bullish, but valuation and positioning tell a different story.”
HAS SO MUCH REALLY CHANGED in just one year? A year ago, markets may have overreacted to the whiff of deflation. “Investors misread the disinflation caused by high inventories, which forced companies to cut production and prices to clear unwanted goods,” says Sean Darby, Jefferies’ chief global equity strategist. Having worked off some excess, companies are lifting production and raising prices of everything from silicon wafers to paper, steel, and copper.
Are markets now similarly overreacting to the promise of growth? Congress’ determination to first repeal the Affordable Care Act pushes back tax reform, for which key pillars like border-tax adjustments are facing stiff resistance. Passing an infrastructure spending bill funded by debt could get trickier the closer we get to the 2018 election year.
So far, stocks have benefited from a benign uptick in rates that Wall Street has wisely branded “reflation,” rather than “inflation.” With rates near historic lows, the Fed still has more weapons to fight inflation. Oil prices surged last spring, so their contribution to year-over-year inflation readings should ease as the year rolls on. And labor automation and aging demographics all will help hold inflation well below levels that once prompted Ronald Reagan to liken inflation to a mugger and an armed robber.
Meanwhile, the consumer price index is up 2.5% from a year ago, and while the Fed looks at other barometers that are just under 2%, the direction is clear. With rallying stocks, peak consumer confidence, a taut labor market, repairing commodity prices, fiscal stimulus, and costlier imports, it will become awfully hard to keep inflation and consumer prices down when everything else is going up.
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