State of the Stock Market Analysis for the Week Ending December 18th, 2016 (Not A Bad Week for Stock Market 12-18-16) All You Need Is Jobs

While Dow 20,000 is not all that important from a technical standpoint, it still is one of those levels that will get a lot of attention as we head toward 2017. The Dow had problems when it reached 10,000 in the late 1990s, and it had difficulty holding that level and eventually turning it into a long-term base. That is why bulls would really like to blow through 20K as quickly as possible. Friday’s early rise in the Dow had bulls thinking that we would close out the week above 20,000, but a late-day, Friday fade left the Dow, Nasdaq and S&P lower. It was not all that bad of a week, though, as the Dow gained 0.4% and the Nasdaq and S&P 500 rose by about 0.1% each for the week.

The Federal Reserve came through on Wednesday with that much-expected rate hike, and the stock market took it in stride. We will not likely see a repeat of last year’s December rate hike that sent the S&P 500 down by 10%, and if anything, we seem to have a stock market that is ready to resume the “Santa Claus Rally” and head higher. What is making the rally tough right now is that it has already come so far since Election Day on November 8th. A little high-level consolidation is healthy right now from a technical standpoint, and a little “backing and filling” like we saw on Friday might be paving the way for more upside.
As for interest rates, the 10-year U.S. Treasury yield rose to around the 2.60% level on Friday, and that yield is up from the 1.80% level we saw just before the November election. What probably has the stock market in a good mood is the fact that the 80 basis-point rise in longer-term rates came into being on its own. It was nice to have the Fed Heads somewhat silent for the past couple of months. Instead of waiting and watching every comment and cough from the Federal Reserve, the market pushed rates higher. The Fed was suddenly “behind the curve,” and maybe that was the healthiest development for financial markets over the past month.
Bond prices have obviously taken a hit with the rising rates, but then again, maybe keeping rates artificially low for eight years was not all that good for the broader economy. All of that TARP and QE may have prevented a Depression eight years ago, but maybe having rates ease back up to more “normal” levels will help the economy act more “normal.” Having the market shrug off the 25-basis-point rate hike this past week was extremely encouraging. Maybe we are moving toward a New Year in which the Federal Reserve and central banks around the world no longer call the shots. That is a New Year’s wish, but it just might be a good direction to move toward in 2017.
So what can we expect for 2017? Well, the stock market seems to be enjoying the talk of tax cuts, deregulation and President-elect Trump’s plans to rebuild U.S. infrastructure. How all of these changes get paid for is the big question, and some economists say that these moves could eventually lead toward inflation. It has been so long that “inflation” was a worry, though, that a whole new generation does not even know what inflation is (aside from health care and college education costs). It will be interesting to see what changes come with the change in leadership, but at least for the time being, investors seem to be giving an optimistic “thumbs up” on the prospects for 2017.
We have 10 trading days left in 2016, and it really would be a plus to see the Dow blow through 20,000 and begin the New Year with 20K as a lasting base of operation. The Gorilla read a great article that since Disney is part of the Dow, some stellar numbers this weekend from Star Wars “Rogue One” could actually pump up Disney stock next week, especially since the House of the Mouse (DIS) has been a Dow laggard this year. A Disney bounce would help the Dow, so we will see what kind of weekend box office the new Star Wars does for Disney, which paid George Lucas a cool $4 billion for the Star Wars franchise. Reviews are good so far, and the Gorilla is excited to see the new film “from a galaxy far, far away!”
The biggest plus of the past month’s rally has been the comeback of financials and energy companies, as well as assorted other overlooked sectors. It has been a healthy rally with few signs of “euphoria,” which is a plus as we head toward 2017. What could go wrong? Well, rising interest rates could be a factor, and DoubleLine’s Jeff Gundlach says that a 10-year U.S. Treasury above 3% could be trouble for corporate and high-yield (junk) bond markets, but we will wait and see if that happens. Investors are in a good mood, so let’s just hope Rudolph can keep Santa’s Rally heading higher. That said, the Gorilla wishes each and all Happy Holidays, and we will be back in action on Monday.

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