The market’s rally to record highs since last year’s U.S. presidential election has the feeling of being entirely risk-free – the S&P 500 yesterday established a record of 242 trading days without a decline of 3 percent from peak to trough.
Monday’s decline of 0.4% for the S&P 500 did nothing to dent the new record, which surpassed the 241-day run that ended in January 1996. Back then, the market continued to rally despite the Southeast Asia currency crisis, the Russian debt crisis and the collapse of hedge fund Long-Term Capital to reach new highs by 2000.
That rally ended with bursting of the dot-com bubble and a recession, and markets proceeded to sink in 2000, 2001 and 2002 – the first three-year decline since the Great Depression.
“Attempts to call the top have proven futile and, for now, the market’s steady advance looks likely to persist,” The Wall Street Journal said in a blog post. “Key elements supporting the rally are well known. The global economy is strengthening and U.S. corporate earnings continue to grow.”
The Dow Jones Industrial Average rose 0.8 percent to a record 23,466.91 by 11:42 a.m. New York time Tuesday on a healthy profit forecast from Caterpillar Inc., the maker of earth-moving equipment.
Investors await the possibility of tax cuts on personal income and corporate earnings to boost economic growth. The U.S. government has yet to approve tax and healthcare reforms promised by President Donald Trump.
As the WSJ points out, central banks like the Federal Reserve, European Central Bank, Bank of Japan and the People’s Bank of China are supporting stocks with low interest rates. As investors seek better gains than the paltry yields of government debt, they are plowing into equities.
“While many investors voice caution about the persistence of the stock market’s advance, they, for now, are mostly unwilling to sell for fear of missing out on additional gains,” the WSJ said. “The top fear for fund managers is that the Federal Reserve and European Central Bank withdraw on their easy-money policies faster than markets expect.”
Investors await Trump's nominee to be the next chairman of the Federal Reserve when Janet Yellen's term expires early next year. A chairman with a bias to keep interest rates low would help to fuel additional stock gains. But unemployment is low at 4.2 percent, and the consumer price index, a measurement of inflation, is a fairly tame 2.2 percent.
The Shiller PE Ratio, a measurement of how expensive stocks are, stands at 31.35 times, which is higher than the peak on Black Tuesday, when the market crashed and ushered in the Great Depression. The multiple reached a peak almost 45 times during the dot-com bubble.
It’s too early to tell whether central banks have defied the business cycle with easy-money policies. The Bank of Japan couldn’t keep the Japanese economy out of multiple recessions, and demographics are generally working against the central bank policies of the world’s biggest economies such as U.S., China and Japan. Countries with higher median ages have fewer workers to drive economic output.
One of the biggest macroeconomic risks will be the health of the U.S. consumer, whose spending drives much of the world economy. Consumers have coped with paltry wage gains and underemployment by financing day-to-day spending with record levels of high-interest credit card debt. Rate hikes and maxed out credit cards may be the triggers for the next recession.
“What can we say about 2017 that hasn’t already been said?” Ryan Detrick, senior market strategist at LPL Financial, wrote in a report cited by the WSJ. “Just remember that markets aren’t always this calm; and a perfectly normal correction of 3–5 percent could happen at any time, if for no other reason than it has been more than 11 months since the last 3 percent correction.”
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