Through the latter part of 2017, bulls enjoyed the Thanksgiving Rally and the Santa Claus Rally, and after so much upside, it seemed that the “January Effect” might fall by the wayside. The January Effect is in full bloom, however, and we closed out the week with the major indices once again hitting new highs. For the week, the Dow rose 2%, the Nasdaq gained 1.7%, the S&P 500 added 1.6%, and the small-cap Russell 2000 joined the party and increased by 2%. The Dow Jones Transportation Index touched new highs as well, and the broad-based nature of this year’s rise has many bulls scratching their heads. Bulls rarely complain about new highs in the stock market, but this sort of ongoing lift is very rare.
The buzz early in the past week was that China might stop buying longer-term U.S. Treasuries, and we saw the yield on the 10-year Treasury rise to 2.60%. We had a very brief market pullback, but buyers somehow stepped back into the game in a big way. Earnings from financials like JP Morgan (JPM) and Wells Fargo (WFC) on Friday were lackluster, but the stock market headed higher. Not even the 4.5% drop in FANG kingpin Facebook (FB) on Friday rattled the stock market at all. News that Amazon’s (AMZN) Jeff Bezos is now the richest man on earth just added to the general optimism we are seeing in the stock market.
The mainstream media is still not talking that much about the booming stock market, nor is it acknowledging that the economy is acting as strong as it is. The employment picture is as good as it has been has been in nearly 20 years, inflation is non-existent, and we even have “tax reform” in place. The concern in the bullish camp is that we might be getting ahead of ourselves, especially since we saw such impressive returns in 2017. This recent run from late-summer has been very impressive, and there are no bullish fans complaining. Bulls are hard-wired to be “bulls,” but when things turn too bullish, bulls become somewhat cautious.
This current rise is nothing like late-1999 and early-2000, but it is clearly moving in that general direction. There are enough bears floating around in financial media to keep things in check, but we seem to be seeing investor and institutional sentiment getting overly optimistic. What could go wrong from this high-level juncture for the stock market? That is the biggest question for investors in 2018. The momentary rise in long-term interest rates this past week is worth watching, but as fast as it came into play, it somehow quickly went away. Stocks rallied into this long weekend, so we will see what happens.
Earnings are in the spotlight for the next few weeks, which should give us some perspective on these elevated levels in so many stocks. We have the transition from Janet Yellen to Jerome Powell coming up soon, and that passing of the torch should be smooth. Powell is a Princeton graduate and has a law degree from Georgetown, so he is probably going to do a great job as a new Federal Reserve Chairman. Ms. Yellen leaves with a very strong economy and the stock market at an all-time high, so she is to be commended for an excellent tenure as the Chairman of the Fed over the past few years.
We are off to a great start for the stock market this year, and bulls are hoping that this rise will continue into this new year. Challenges inevitably await us, but at least for the time being, the numbers look good. That said, the Gorilla wishes each and all a relaxing winter weekend, and we will be back in action on Tuesday. Politics will likely continue to be politics, and it is a plus that the stock market seems to ignore the political scene in Washington DC. Have a great weekend!
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