Friday’s action in the stock market was interesting to say the least. In the final minutes of trading, the Dow and the market in general, spiked enough to present the Dow Jones Industrial Average with its 11th-straight all-time high close, and that apparently has not happened since 1992. All three of the major indices finished higher on Friday, and that closed out a productive week for the majors with weekly gains of 1% for the Dow, 0.1% for the Nasdaq and 0.7% for the S&P 500. It was a fairly quiet, holiday-shortened week, but it was still very impressive to see this ongoing rally somehow manage to keep edging higher and higher.
Bullish strategists are scratching their heads, and it was actually “bullish” for the “bullish” guys to be feeling a bit perplexed and queasy. Few on Wall Street predicted the “Trump Bump” following last November’s election, but it happened just the same. From Election Day, the Dow is up about 13.5%, the Nasdaq is up around 12.5% and the S&P 500 has risen roughly 10.5%. That is quite a bounce, and whether it has been driven by politics, earnings, economic numbers or investor optimism, few bulls are complaining. Bulls may not be complaining, but there is a sense of nervousness building that things may have gone “too far, too fast.”
Without going into politics, it seems as though investors and the stock market are liking the Trump Administration’s big push toward massive tax cuts and deregulation for businesses. It will take time to have these plans hammered out, voted on, and put into action, and it will take a year or two for these moves to have any real economic effect. But there is no doubt that investors are liking what they are hearing. Trump’s recent meetings with U.S. CEOs is playing well, and his promises to “bring back jobs” and to “stimulate the economy,” might be the force behind the strength we are seeing in this ongoing stock market bounce.
For all of the recent bullishness, we are seeing some counter-developments that have some strategists worried. The yield on the 10-year U.S. Treasury was up around 2.6% in mid-December, but it has been edging downward to where it closed Friday at 2.32%. If the stock market is so strong, many ask, why would money be flowing into the safety of Treasury bonds? Well, we have upcoming elections in Europe, and the “Brexit” mentality could sway big countries like France toward the “anti-EU” sentiment that we saw in England last year. This might explain the big buying of U.S. stocks and U.S. Treasuries, but who knows?
Another “strange” development is the ongoing low level of the Volatility Index (VIX) which is holding its own below 12, meaning that “insurance” against market declines is not on too many institutional minds. Market historians often warn that too much “complacency” often precedes market declines, but then again, why worry when the market keeps rising? We all know that the stock market is healthy when it climbs the “Wall of Worry,” but it is somewhat unhealthy for the bulls when stocks climb the “Wall of No Worry.” We will keep a close eye on the VIX in the days and weeks ahead!
The Federal Reserve is on the docket for its mid-March meeting, and the odds of a rate hike seem good. Janet Yellen speaks next Friday, so that should offer some signals on what the Fed might have planned for its March meeting. With the economy remaining strong, and with the stock market at an all-time high, a Fed rate hike of 25 basis points might not even be noticed by the stock market. If anything, a rate hike might be welcomed. The weakness we saw in financials this past week or so was likely the result of the fall in longer-term rates, so maybe the Fed raising rates might be just what the big banks and financials would like to see.
That said, the Gorilla wishes each and all a relaxing final weekend of February. Spring is on the way, but be ready for a few bursts of snow or rain (depending on where you live) before then. We will be back in action on Monday, and we will see how this bullish bull market unfolds as we head into 2017.
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