The stock market rally seems to have taken a breather waiting for promises to be turned into action. Pro-growth policies and burdensome regulation are mentioned daily, but even with one party control of our government, talking about it will be easier than getting it done. The low hanging fruit will be issues that don’t involve the legislative branch (Trade and immigration). More challenging will be those that do. (Tax reform and infrastructure spending). Federal deficits do matter and don’t forget the FED. Years of liquidity have fueled higher and higher valuations and the FED is still a powerful factor in how markets perform. Higher growth and higher inflation will be watched closely by Ms. Yellen (If she’s still with us). I’ve mentioned in an earlier post that current quarter earnings need to align closer to market valuations. So far 4th quarter earnings are not helping. The fuel is ready, waiting on a catalyst and there are plenty of candidates lined up and eager to strike the spark. Keep your eye on the dollar. A correction looks likely unless the promises turn into action quickly.
Long time market analyst Howard Barlow had an interesting post this weekend about the S&P. Here’s part of that post,
“In 2016 from February 11th through election day…the SPX advanced from 1811 to 2139, COC (cash on close) figures reflecting roughly a 16.7% rise in nine months. From 11/9/16 (post E-day) through the recent closing high of 2277 on 1/6/17, SPX clawed out a bonus bump of 6.7% (in 67 days). I do not envision between 1/23/17 and the end of Q1 ’17, any ascent remotely approaching 6.7% to grace the calendar span until 3/31. While the tape of TINA (There Is No Alternative) may still apply, rates have reversed and will rise, albeit gradually.”
Looking for the next bump may take some time. Feeling the next pothole may not.