Since the U.S. presidential election, the Dow Industrials are up 9% and more than 14% year to date. On Tuesday, the index flirted again with the 20,000 level: As of 3:00 PM Eastern time, it was up 20 points on the day to 19,953. But other than a nice round number, is that achievement really something to celebrate, or worry about?
In a blog post earlier this month, Brad McMillan of Commonwealth Financial Network noted that the S&P was already up more than 3% in the month and near its all-time high, writing that “the post-election rally has morphed into a Santa Claus rally without missing a beat.” As for Dow 20,000, McMillan pointed out that such milestones “first act as a ceiling, but if there’s enough energy to move through them convincingly, they then tend to act as a floor.” However, McMillan concluded that with both fundamentals and consumer confidence improving, “if we can break through Dow 20K, future gains are likely,” helped along by institutional investors’ year-end buying.
In an investment note issued Tuesday, Jeff Saut of Raymond James cautioned against year-end investment letters, especially those full of predictions since, after all, “how many pundits predicted Brexit, or a Donald Trump victory?,” yet voiced optimism, again because of the fundamentals. One of those fundamentals might be the end of a central bank-stimulated economy and bull market. “The biggest message as we prepare to enter 2017,” Saut wrote, “is that the equity markets are transitioning from an interest rate driven bull market to an earnings driven bull market.”
McMillan suggested that the turnaround in corporate earnings “should continue and may even accelerate as the economy improves.” He, like Saut, is also cautiously optimistic over the Trump promises of corporate tax reform, which the Commonwealth CIO said “should add materially to earnings growth.” Saut wrote in his Dec. 27 note that “it is our belief the equity markets are looking forward to a huge rebound in earnings.”
In fact, McMillan believes that “the actual facts of the economy (employment, spending, housing and so forth) have been much better than the perception of them. If perception catches up with reality […] expect even faster growth.” That may in fact be happening now. The University of Michigan’s Consumer Sentiment Survey rose again in December, with the highest level of respondents mentioning (spontaneously, Michigan said) they expected a favorable impact from President-elect Trump’s economic policies. The Conference Board announced today that its index of consumer confidence climbed in December to the highest level since August 2001.
Home Price Index Also Moving Up
In another sign of the economy’s strength, the S&P CoreLogic Case-Shiller US National Home Price NSA Index has reached its second consecutive all-time high, S&P Dow Jones Indices said Tuesday.
However, David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices, noted in a statement that affordability measures based on median incomes, home prices and mortgage rates show declines of 20% to 30% since home prices bottomed in 2012. “With the current high consumer confidence numbers and low unemployment rate, affordability trends do not suggest an immediate reversal in home price trends,” he said. “Nevertheless, home prices cannot rise faster than incomes and inflation indefinitely.”