MARKET ALERT – Rumblings Up, Down, and Around Wall Street – Issue #411 dated November 27, 2016 – with Ray Dirks of RAYDIRKS Research and his team of securities analysts and money managers, along with the internationally-followed Web Sites, www.CorporateProfile.com and www.CPreports.com, where Fashion meets Finance, and where Stocks meet Blonds.
Well, well, well…What another strong week it was – Thanksgiving week – as the stock market in the United States followed through as Rumblings predicted in last week’s issue.! All three major averages hit new all-time highs – the Dow Jones, the S&P 500, and the Nasdaq.
Rumblings thinks this very favorable trend will continue for the six weeks remaining in 2016, and we think our stock will advance by 15% to 25% next year. Accordingly, we think some of Rumblings’ Favorite Stocks for 2016 could move up in 2017 by as much as 200% to 600% in 2017.
We’ll discuss more about these Favorite Stocks later in this report, but first – let’s quote from tomorrow’s “The Trader” column in Barron’s, The Dow Jones Business and Financial Weekly, where the headline reads : “Trump Rally Continues, Sending Dow Up 1.5%”
The column starts off : “Market action during the Thanksgiving-shortened trading week indicated that the post-election rally is no turkey.
Indeed, it has legs. Wings, even.
The Dow Jones Industrial Average and the Standard & Poor’s 500 index rose every day last week, and both were up for the third consecutive week, hitting new records. The Dow jumped 284 points, or 1.5%, to 19,152. The S&P 500 rose 21 points, or 1.4%, to 2,213. The Nasdaq Composite also rose 1.5% to a new record.
The Russell 2,000 index, which tracks small-caps, has been on an absolute tear, rising 15.8% in three weeks. On Friday, it clocked a 15-day winning streak.
The market is pricing in a near-certainty of faster gross-domestic-product growth next year, says David Waddell, chief investment strategist at Memphis-based Waddell & Associates. If the current trend is for GDP growth of about 2.8%, “that could go to 4.5% pretty quickly,” he adds. “That’s why there’s so much euphoria. We’ve seen big piles of cash coming into the market. People were so terrified of the election, and now all of that cash is coming back in a hurry. That’s why the market’s not going down, because everybody’s buying every dip now,”
But isn’t that euphoria usually a red flag?
“Do not underestimate the value and the amplifier of animal spirits,” Waddell says. Animal spirits, once unleashed, can be pretty super-fantastic economic additives.
And then, in the style of President-elect Donald J. Trump, he exclaims: It’s gonna be yuge!”.
Despite the rally in the Russell 2,000, Waddell continues to like small-cap stocks. Small-cap value names tend to do well during periods of high growth and low taxes, he notes, pointing to the disproportionately large rally among those stocks in the early 1980s, Small-caps benefit the most from tax cuts because they don’t benefit from an army of accountants that can reduce their tax bills.
A cut of six to seven percentage points in corporate tax rates should result in a 10% increase in earnings per share for small-caps, notes Jason Pride, director of investment strategy at Glenmede. And Trump has called for a lot more than that – a decrease in rates to 15% from 35%. “The rally in small-caps is more than justified,” he says.
Waddell’s sense of bullishness is widespread. But not everyone has given up looking for the brake. Jeff Carbone, co-founder of Cornerstone Financial Partners, says the influx of cash at this stage of the rally has begun to make him cautious.
“My fear is people are trying to chase,” he says. “You can see by inflows that people are starting to think they’re going to miss something.” Sometimes these animal spirits can lead to misconceptions.
Clients are calling Carbone asking why their portfolios haven’t boomed as much as the Dow, which has risen 7.1% in the past three weeks. Because the Dow is dollar-weighted and Goldman, Sachs Group is among its priciest stocks (on a dollar basis), the index’s surge has been distorted by the rise in financial stocks. “People hear all about how well the Dow is doing, but the overall market has not benefited as greatly from the Trump rally,”
Beyond financial stocks, which could benefit from higher interest rates and a rollback in regulations, investors have been making bullish bets on health care, on expectations of changes in regulations and a rollback of Obamacare, and industrial stocks, which could benefit from infrastructure spending.
Tech stocks, which had struggled immediately after the election, rebounded last week. Facebook rose 2.9% and Amazon.com was up 2.7%. And utilities got a bit of a reprieve after falling since the election. The Utilities Sector SPDR ETF rose 1.9% on the week.
Precious metals continued to fall, however, belying pre-election expectations that investors would buy gold to hedge against uncertainty. Gold futures dropped 2.5% last week to $1,178 per ounce.
The coming week could determine the path of the market in December. On Friday, the government will release November jobs data, giving investors more clarity on whether the Federal Reserve will be raising interest rates.
Rumblings suggests that readers/investors place no more than 1% of the funds they devote to common stocks in the securities of any one company. It’s best to diversify…!
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