Pillars of Current Rally
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Market strength tends to beget more strength and a greater frequency of new highs usually perpetuates higher highs. All major indices hit new all-time highs last Friday. But many folks on The Street are worried that the Trump rally can't last and that valuations have gotten way ahead of underlying value. Truth is this rally or any rally doesn't last forever. But this rally has legs and is not likely to get derailed until a new Trump administration fumbles, falters and really screws something up. And that can't officially happen until January 20 when Trump takes office.
This rally's legs are supported by a few main pillars. First, growth appears to have picked up and turned the corner. 2016 Q3 GDP was revised higher today, rising at a rate of 3.2% annually. With nearly all S&P 500 index companies reporting results, profits were set to rise 4.2% in the third quarter of 2016, likely ending the streak of five consecutive quarterly earnings declines.
Secondly, although the Fed is extremely likely to raise rates in two weeks (CME Group FedWatch tool has the probability now at 96.3%), the Fed Funds rates will remain historically low at well under 1%. Perhaps the Fed's "fake it 'til you make it" mantra is finally paying off and the economy is beginning to grow organically. The fact that they are actually finally ready to raise rates again is the clearest sign the economy is growing on its own. The Fed may yet prove to have been too late in raising rates, causing rampant inflation down the road, but that is some time off and not likely to impact us until after the first 100 days of the Trump Administration or later in Q2 at the earliest.
That brings us to the third pillar: Trump. Whatever your ideology or however you voted, Donald Trump is our next President. And he likely brings about the greatest potential for change in U.S. government policy since the mid-1970s and early 1980s.
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This article was written by Jeff Hirsch for Almanac Trader on Nov 29, 2016.
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