U.S. equities climbed to new record highs on Friday in what’s becoming a speculative fever following the surprise electoral victory of President-elect Donald Trump. Combined with the seasonal tailwinds in play at this time of the year, as well as portfolio shifts as investors pull money out of bonds (which have been hammered) and pour them into stocks, there is simply no stopping the uptrend.
In the end, the Dow Jones Industrial Average gained 0.7%, the S&P 500 added 0.6%, the Nasdaq Composite gained 0.5% and the Russell 2000 gained 0.1%, rising 16% since the election.
Treasury bonds were weaker again, the dollar was stronger, gold lost 0.9% and oil gained 1.3% ahead of a meeting between OPEC and non-OPEC countries on Saturday to strengthen a recent production freeze agreement. The ongoing weakness in Treasury bonds — and the resultant increase in long-term interest rates — boosted the ProShares UltraShort Treasury (NYSEARCA:TBT) to a 34.2% gain for Edge subscribers since recommended on Aug. 16.
Trading had a defensive theme as investors rounded back to areas that have lagged the market’s uptrend thus far. Consumer staples gained 1.4%, healthcare gained 1.2%, and utilities climbed 1%.
Airlines were on the move with United Continental Holdings Inc (NYSE:UAL) up 3.3% and American Airlines Group Inc (NASDAQ:AAL) up 3.3% on better yield guidance. Troubled teen retailer Abercrombie & Fitch Co. (NYSE:ANF) fell 2.8% after being downgraded to sell from hold by Argus analysts on a failed rebranding campaign and findings of diminishing importance of brands to its key demographic. And Apple Inc. (NASDAQ:AAPL) rose 1.6% to break out of a two-month consolidation range thanks to fresh buying strength in big-tech stocks (in area of post-election weakness).
On the economic front, the December reading for the University of Michigan Consumer Sentiment index came in at 98.0, just below its recent peak from January 2015 which was the best level for the measure since 2004. Both expected and current conditions components posted a strong rise driven by the initial reaction to the Trump win.
In fact, the details of the survey revealed more respondents mentioned positive expected impacts from new economic policies than ever before in the history of the survey. Of course, both investors and consumers are in a “honeymoon” period right now with Trump; in just over a month, after the inauguration, the realities of governing will hit and the ebullience will fade as things like the need to raise the debt ceiling in March and the drag on the deficit from higher interest rates become clear.
That isn’t to say the uptrend won’t march on into 2017. Just that the euphoria should give way to reasoned analysis. You know. Like Trump’s efforts to clamp down on immigration and open-border trade deals will likely pinch corporate profitability. Or that his fiscal plans, all else equal, would double the national debt.
For now, however, none of that matters.
Overbought technical conditions, red-hot sentiment, and stretched equity market valuations? Those don’t matter either, but they are warning signs for those looking to extend their long positioning.
The Bespoke Investment Group notes that the S&P 500 is well above two standard deviations above its 50-day moving average. The latest Investors Intelligence survey showed those with bullish sentiment increased to 58.8%, the third reading in the “danger zone” and nearing the 60%+ peak seen when the market was topping in mid-2014. And Goldman Sachs notes that the median S&P 500 company trades at the 98th percentile of historical valuation.
The only remaining catalyst that could trip stocks up before the end of the year is the upcoming Federal Reserve policy announcement on Dec. 14 widely expected to feature another 0.25% interest rate hike as well as fresh guidance showing an aggressive pace of hikes in 2017.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
