TGIF – Running with the Bull

The S&P increased 6 straight days to start the year. It is up 2.9% during this period, the best start to a year since 1987. It’s the first 6 straight up days since 2010. But the 6 consecutive new highs to start a year is the best since 6 in a row in 1964. The strong start bodes well for the year. Since 1950, when the first 5 days of a year are up 2%, S&P 500 is higher for the year 15 out of 15 times. It happened twice this decade, as recently as 2013. The average return for these 15 instances is +18.6%. The S&P was up a whopping 30% in 2013. So, the perfect history will be tested this year.

The Bulls are completely in charge with fresh new highs on the S&P 500 daily. What could derail the rally? Well interest rates and inflation are 2 that are sort of tied together. Interest rates are on the rise again with the 10-Year Treasury yield punching through that important 2.5% level for the first time since March. It looks like a breakout to the upside. Perhaps more important, the 2-Year Treasury yield cleared 2% for the first time since before the Financial Crisis! The price of money is on the rise and should increase further. This will impact housing prices too. 3 more rate hikes are expected this year from the Fed.

Commodity prices have been strong with a new uptrend, led by Copper and Oil. Brent Crude prices cleared $70 yesterday, for the first time since 2014. West Texas Intermediate Crude touched $65 this week, also a multi-year high. Demand is increasing with the accelerating global economy. Inflation is being sniffed out too, something that has been absent throughout this 9-year Bull Market. These are generally late cycle events, which suggests a strong global economy. That is something these Markets have been pricing in all last year and into the new year. Price/Earnings ratios are getting pretty stretched. But when the “E” keeps moving higher, the “P” will absolutely chase and in fact overshoot it. We’re in that part of the cycle. It’s happening.

Tech is due for a breather. We’re starting to see it. Importantly, Market leaders have rotated all along. Leadership has switched to Global Growth themes, like Energy and Basic Materials. International Markets are leading too. It’s healthy. And these segments have plenty of catch-up to do as they’ve already corrected. We do believe that 2018 will bring a significant reversion to the mean, so sell-offs will come. From what level, it’s impossible to tell. The momentum is so strong right now. We aren’t fighting the trend. We’re running with this Bull while we can. But we’re well aware of Newton’s Law. What goes up, must come down. As you know, there hasn’t been even a 3% decline since mid 2016. Logic tells us, there will be in 2018. We will be ready. But there’s still a lot to like in this Bull Market.

Have a nice weekend. Our office will be closed Monday, in honor of Dr. Martin Luther King. The Market will be closed too. We will be back, dark and early on Tuesday.


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