Key Indicators Continue to Turn
December 19, 2016, 2:45 pm
We’re down to less than two weeks left in the trading year, and while stocks took a breather after last week’s Federal Reserve meeting, they are consolidating at new levels well above the pre-election worry. The S&P 500 hasn’t dipped below 2,200 all month while the Dow hovers within 1% of 20,000 even on the slow days. The change in trading and tone has been remarkable these last five weeks.
From what we heard from the Fed when it raised interest rates on Wednesday, the increased optimism is justified. Unemployment is back where it was in the 2006-2007 boom years, and President-Elect Donald Trump is talking about job creation. By 2018, the Fed projects unemployment will be down to 4.3%, lower than at any point since the long dot-com revolution ran out of steam.
That’s significant. It means the next few years could finally become the Main Street recovery many have spent their adult lives waiting to experience. Others have probably forgotten what a true boom feels like or how markets operate when the macro environment cooperates. A flourishing economy means money is flowing fast in and out of corporate balance sheets. Profits swell, and the accelerated activity gives management new incentives to innovate and invest in their businesses.
The economy may not be booming yet, but the key indicators are turning at a healthy speed. Corporations are now on track to deliver the best sustained year-over-year growth since the 2005-2007 boom (omitting the stimulus-fed 2009-2010 credit crash recovery). Expectations are for earnings to be 10%-11% higher a year from now, which is historically enough to support at least normal stock market appreciation of roughly 10% a year, and occasionally something a lot more dramatic.
The last time corporate earnings recovered from a sustained stall was 2013, and stocks soared 30%-40% as traders rushed to buy the boom. This week alone we saw $21 billion pour off the sidelines into equity funds, and there’s still $2.7 trillion parked in money market accounts. We won’t see every cent of that go into stocks, but it doesn’t take a lot of added money to keep this rally alive.
Over the next two weeks, a lot of money managers are going to want to dress their books, too. That means dumping losers and grabbing the best-performing names to prove to clients that they’re on the ball. So if you’re planning on making some adjustments to your portfolio as well, look to see where momentum is already strong. Those are the stocks likely to outperform as we head into the New Year.