MARKET-ALERT – Rumblings Up, Down, and Around Wall Street – Issue Number 464 dated January 28, 2018 – with Ray Dirks of RaySearch and his team of securities analysts and money managers.
‘Twas another exciting week on Wall Street in the week just ended – as all three major indexes closed at new all-time highs on Friday, January 26. Rumblings’ Ten Favorite Stocks were also big winners for the week as nine of them are up nicely in January, led by Aflac, Amazon, Amtech, Citigroup, and International Paper.
In order to provide Rumblings’ Readers/Investors with some perspective on the U.S. equity market, let’s quote from tomorrow’s “The Trader” column in Barron’s, The Dow Jones Business and Financial Weekly, where the headline reads: “When Too Much Good News Is Bad News”:
“The market is having a feel-good moment – maybe a little too good.
The Dow Jones Industrial Average gained 545 points, or 2.1%, to 26,617 last week, while the Standard & Poor’s 500 index rose 2.2%, to 2,873. And the Nasdaq Composite climbed 2.3%, to 7,506. All three indexes closed at all-time highs Friday. For the S&P 500, it was the 14th record high of the year, setting a record for the number of new highs in January.
And why shouldn’t the market feel good? Earnings season has been stellar, with S&P profits growing at a 1.7% clip, with a quarter of companies reporting. Credit sparkling results from the likes of Intel and Caterpillar. Fourth-quarter economic growth was lighter than expected, but strong enough, especially given that tax cuts could provide a boost in the quarters ahead. The Davos elite came away feeling relieved after President Donald J. Trump loudly proclaimed that “America is open for business”, and his administration is said to be readying a $1.7 trillion infrastructure plan that could be revealed next week. Party on, right?
That very well could be. Thomas Lee, head of research at Fundstrat Global Advisors, notes that the S&P 500’s rise has gone parabolic. Its 6%-plus gain this month trounces the 2% average monthly advance from September to December 2017 and the 1.2% average monthly gain from January through August 2017. Rather than being worrisome, these accelerations into a new year have historically led to even more upside. Only eight years have played out like this since 1928, and just two – in 1929 and 1946 – were followed by big drops in the market. The other six times – in 1936, 1951, 1989,1997, 2006, and 2017 resulted in an average gain of 20% over the remainder of the year. If that scenario plays out, the S&P 500 could close the year near 3350, Lee says.
But there’s also a point where feeling good leads to bad behavior: U, S. gross domestic product rose at an annualrate of 2.6% during the fourth quarter, missing economists’ forecasts of 2.9%. But dig into the numbers and you see one area of major strength – consumer spending, which grew at a 3.8% clip. That could get even stronger if individuals with lower tax rates spend their windfalls. Not everyone is celebrating. Gluskin Sheff’s chief economist, David Rosenberg, notes that rising markets have made Americans feel wealthier, so they’ve been spending more and saving less. “This is a classic late-cycle development,” he says.
Consumers aren’t just spending money on clothes, cars, and whatever else catches their eye – they are also buying stocks. Investors have put $24 billion into equities during each of the two most recent weeks, notes Bernstein strategist Inigo Fraser-Jenkins, a big change from 2017, when they withdrew $9 billion during the last six months of the year. That’s not worrisome – yet – but if investors buy stocks at just half that rate in the next four weeks, it would be. “We are not saying that will happen, but it quantifies how sentiment can change,” Fraser-Jenkins says.
And when it does?”
Well, Rumblings does not think the current positive sentiment toward the U. S. stock market will change in the next few months, or even further out. As we have been stressing for a long time – way back into the Obama era – we’re advising Rumblings’ readers to switch heavily into common stocks – and to sell fixed-income securities to raise the money to accomplish this.
In fact, we suggest that Readers/Investors check with their investment advisers and then sell bonds in order to purchase stocks of well-managed companies such as those on the list of Rumblings’ Ten Favorite Stocks for 2018. A clear reason to do this is that is that interest rates are very low compared years past, and, in our view, will rise very sharply because of the changing government monetary policy over the next several years – thus bringing bond prices down to much lower levels.