If you’re like me, you find it hard to believe that on the one hand we’re already in December, but on the other hand it has been less than a month since the election became a defining moment. November started with Wall Street braced for political apocalypse and ended with a breathtaking 40% of all stocks trading within 10% of their 52-week highs. Just as important – if not more so – is the sense that even better performance is coming.
Rotation remains the name of the game right now. We’re seeing technology stocks under pressure while the financials prosper on the prospect of higher interest rates ahead, but that balance shifts day to day. Likewise, oil prices and related stocks had a great week, while biotech stocks are floundering. What does one have to do with the other? That’s been the way money has rotated recently – the “algo” as it is often called on the Street, short for algorithm. Big money has been selling biotech to buy into energy.
As we look toward the end of the year, the environment favors stocks in general, so the rotation we’re seeing is constructive instead of an empty churn. Traders now have earnings on their side for the first time in years. That translates into a tailwind for the market as a whole, lifting strength and weakness alike as money moves off the sidelines. Early signals from the incoming Trump administration indicate a corporate-friendly year coming up, which should also help keep cash flowing through the market and into our pockets.
We also have a market and an economy that seem comfortable with an interest rate increase, unlike a year ago at this time. The November employment report was solid. There were some concerns down in the details, but the 178,000 jobs created last month ought to be enough for the Federal Reserve to raise rates when it meets next week.
The overall trade thesis on Wall Street right now is for bigger economic growth, which is why the market can even contemplate a rate hike without buckling. We saw evidence of that last week with Caterpillar (CAT), the heavyweight in construction and mining equipment. Management said that Wall Street’s expectations are too high – the stock was even halted at the time – but shares finished the day higher anyway.
That’s almost a boom mentality. A lot of investors may not remember what a boom feels like – and those who started investing in the post-2008 lull may never have experienced it – but I remember. And I remember how much fun it is to trade it. One of the many nice things about that kind of environment is that investors have more freedom to hold on to winners for bigger gains.
With earnings growth likely to fire on all cylinders next year, institutional investors will want to buy stocks now while they can, so traders will have more money flow, trends and rotation to capitalize on.