After last week’s market fireworks to the upside off the election, this week probably felt rather dull to anyone watching the stock market benchmark indices. The Dow grinded sideways and ended the week up a tad at +20 points. Under the surface however a great deal of very healthy action was occurring. This was a very busy week for us to check under the hood the health of the underlying market and the economy.
We have been following many similarities over the past year and half to the transitional economic and market landscape we saw from 2011/2012 into 2013. We saw a Market and economy that largely went sideways, consolidating or resting allowing the fundamentals to catch back up and propel prices higher yet again. What we have seen this past month is also eerily similar to that of November 2012, when the government was playing chicken with sending us over the supposed “fiscal cliff”. The setup fundamentally and technically last week with the election had lots of correlation to 2012.
Often times when the market and economy are setup to turn strongly one way or the other a big headline catalyst becomes that point in time which creates the initiation of that explosive move. In this case higher. We can point to many headlines in recent years which have done just that. If you look at the chart above the Fiscal cliff of late 2012 became the catalyst to start the strong move we saw into 2013. We believe the election of 2016 is a similar potential catalyst to propel us into a very strong 2017.
Many fundamental factors have gone sideways since late 2014 and early 2015 to present. Earnings on the S&P 500, revenues on the S&P 500, job growth, manufacturing production & GDP. All of these metrics have started to move up this Fall. Sometimes stock prices anticipate that which is not priced into the market, and this recent run up is doing just that. Areas of strong potential growth have been leading strongly like industrials, transportation stocks, biotech’s, financials, and small market capitalization stocks (think Russell 2000). This is a very healthy transition we want to see continue.
This week was exactly the type of action that we wanted to see out of last week’s strong move: consolidation in the indices as an immense amount of sector rotation happened under the surface.
As we approach the holiday season, we are busy getting portfolios in shape heading into 2017.
Have a great weekend.
By: Mike Harris