Dow Crosses 18,000 for First Time on GDP Surge

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It doesn’t get much better than this. The economy is firing on all cylinders. Gas prices have halved over the last six months. And stocks have never been higher. Just the thing to brighten holiday spirits.

A week ago, things were looking pretty scary. Stocks were dropping hard on worries that lower oil prices would pinch corporate profit margins and weigh on GDP growth via lower investment spending. Falling oil prices were also expected to roil the high-yield bond market as high-cost U.S. shale oil producers suffer from OPEC’s efforts to recapture market share. In what could be classified as a Christmas miracle, seven days later, it’s nothing but good tidings and great joy.

On Tuesday, the Dow Jones Industrial Average gained 0.4% to close at 18,027 and the S&P 500 gained 0.2% to extend its rise above the 2,000 level. But things weren’t universally positive, with the Nasdaq Composite dropping 0.3% and the Russell 2000 adding only 0.1%.

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Energy stocks led the way with a 1.3% gain thanks to 3.3% bounce in crude oil futures. Healthcare was dragged down 2.2% on biotech weakness in what was the biggest pullback since the middle of October. The catalyst was the ongoing fallout from the deal between Express Scripts (RSRX) and AbbVie (ABBV) to discount the latter’s Hepatitis C treatment and the potential impact it could have on industrywide pricing.

Investors responded to a blowout final revision to the third-quarter GDP number, which increased to a 5% annualized growth rate — the single best quarter for the economy since 2003. Following a big November payroll report, things are looking good for the United States. A separate report on personal income and consumer expenditures was also solid.

Good Times Can’t Last Forever

Amid light pre-holiday trading volumes, stocks have enjoyed a surge of buying interest that started, initially, with a short covering surge but has been maintained by optimism that the two sources of concern that drove stocks lower in early December have faded. The first was the unsettling declines in the junk bond market. The second was the currency market volatility that hit Russia.

With both situations stabilizing over the past few days, the path of least resistance has been solidly up.

But that could soon change as the seasonals become more difficult after the Christmas break this week. According to the folks at SentimenTrader, the CBOE Volatility Index (VIX) — dubbed Wall Street’s “fear gauge” — has only increased four times in 28 years in the two days ahead of the Christmas break. But from the close on the day before Christmas to the end of the year, the VIX jumped 24 out of 28 times, for an average gain of nearly 9%.

And from a fundamental perspective, stocks are nearing levels that many brokerage analysts had penciled in for their year-end 2015 targets amid expectations of a tougher profit environment and full price-to-earnings valuations. Jonathan Glionna at Barclays Capital is looking for 2,100 on the S&P 500 — just 0.7% above current levels on expectations of modest earnings growth next year.

At the same time, overall S&P 500 forward earnings revisions are being marked down at a pace that, historically, has been associated with recessions.

Add it all up, and things are likely to get more difficult for investors starting as soon as Friday.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/12/dow-crosses-18000/.

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