TGIF! – A Remarkable Run

The Bull rally continued this week, with both the DOW and S&P again reaching fresh, new highs.  It’s been a remarkable run and one that has caught so many of guard.  The S&P 500 reached $20 Trillion in Market Cap for the first time in history.  The Global Stock Market is now worth over $70 Trillion.  The Dow Jones Industrial Average did something Friday it hadn’t accomplished in 30 years and only twice in its 121 year history.  The DOW recorded its 11th consecutive daily increase to close at new highs.  The Dow Jones Industrial Average has not closed in the red since February 8th.  It’s actually only closed down 3 times this month.  It now rests over 20,800 this weekend, a level never before seen.  It’s been a historic run.

To put this historic streak in perspective, the only other time the DOW hit 11 consecutive new highs was in 1987.  In fact in ’87, it actually hit a record 12.  Reagan was still in the White House.  Bill Walsh was still the Niners head coach.  Paul Newman won the Oscar that year for the “Color of Money”.  A dozen eggs cost 65 cents and the median home price was valued at $85,000.  1987 was also the year that Oliver Stone released the film “Wall Street” starring Michael Douglas as the fictional investor Gordon Gekko.  He coined the term. “Greed is Good”.  Perhaps it’s ironic that this milestone is achieved ahead of the Oscar’s this weekend and the State of the Union speech next week.

Comparisons between 2017 and 1987 are becoming pretty common.  This win streak is certainly adding fuel to the fire.  The Bull Market which began in 1982 enjoyed a strong 5th year on the back of tax reform and looser regulations as part of Reaganomics.  The DOW hit 2,000 for the first time in 1987.  As you know, it hit 20,000 for the first time this year.  Of course investors remember the Black Monday crash in October of ‘87.   We see very little similarities in comparison.  The current rally this year has also been driven by expectations for tax reform and looser regulations.  Pro-growth policies are certainly being priced in today.  But importantly, Corporate Earnings have been accelerating, as has the US economy.  Both of these were evident in October, before the Presidential election.  The 2-year earnings recession came to an end last year and growth has returned.  Make no mistake, this is an aging Bull Market, but we still believe there is more life in it.  The Stock Market is no longer dependent on zero percent interest rates and central bank stimulus.  Interest rates have finally risen for the right reason.  The growth engine is real and it’s humming.

For those interested in the Earnings scorecard:  Nearly 90% of S&P companies have reported earnings for the 4th Qtr and calendar 2016.  They’ve been good.  66% have beaten earnings estimates.  Only 22% have missed.  Both Tech and Health Care have had the highest percentage of beats, both over 80%.  Utilities have the lowest, at 40%.  Over half of the S&P companies have beaten on revenues.  Overall, earnings for Q4 are tracking at 7.5% growth from a year ago.  That is very solid.  Even more important is the 5% revenue growth thus far reported.  Revenue growth has been missing for years, and is the truest sign of demand.  The estimate for 2017 earnings are now $133.49, which has this Market trading at 17.7X estimates.  That’s not cheap but not wildly expensive either.

We do think this Market is a little overbought right now, and expect a breather.  We have been enjoying this rally and have already been taking profits and raising cash to preserve capital.  Our fundamental and technical signals we study are telling us that a minor selloff is likely.  We still see higher levels ahead and believe the selloff will be buyable.  We absolutely anticipate more bumps in the road ahead.  A selloff is only a buying opportunity when you have cash to buy things.  Something you might not have noticed was Gold hit a 4 month high this week.  We see it going higher.  We are maintaining our discipline.  If the facts change, so do we.

Enjoy the Weekend.  We will be back, dark and early on Monday.  We’re all over it.


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