What to Expect Following an Historic Week
January 30, 2017, 3:25 pm
Wall Street has been waiting on pins and needles lately, but last Wednesday the Dow finally reached (and then broke) its 20,000 threshold. It only took the index 42 days to rally the thousand points from 19,000. However, if you’re placing your order for Dow 40K hats, you may want to skip the expedited shipping. It took the index 17 years to double from 10,000 to 20,000.
As we’ve talked about, the Dow hitting this historic milestone isn’t necessarily bullish in technical terms, but it does have larger psychological implications. Most headlines had something to do with Dow 20K and social media was similarly abuzz.
This type of media exposure does two things. First, it gives those investors sitting on the sidelines the “sign” they’ve been waiting for to get back into the market. And even more important is that it nudges those who have sworn off the market over the last decade due to volatility and negative connotations regarding Wall Street. There’s a major case of FOMO (or the fear of missing out) going on around the country, and those who have sat on their cash all this time will finally begin to realize that they’ve missed out on a major market rally. They’ll fear that if they don’t get back in soon, they’ll also miss out on the next chance to make big money.
It’s difficult to argue with the turnaround in corporate earnings over the last two quarters. On top of beating expectations in the third quarter, S&P 500 companies also reported positive quarterly results for the first time in more than a year. Now we’re in the heart of the fourth-quarter reporting season and once again, the numbers look better than expected.
Approximately 70% of the S&P 500 companies that have already released their numbers have beat Wall Street’s estimates, and there are still a lot of heavy hitters left to report. From day to day, the market’s PE ratio is irrelevant because trading is actually being driven by news and emotions. However, the PE is still extremely meaningful over the longer term, so considering the “E” in that equation is earnings we still want to see results increase, as it will not only make the ratio more attractive, it will be a catalyst for the current rally to continue.
I don’t normally like to toot my own horn when I make accurate market predictions – I prefer to let our results speak for themselves – but this time is different than most. For months, I have maintained my positive outlook on the market even as Wall Street analysts have wavered between the bullish and bearish camps, causing panic for many investors out there. That conviction has paid off—and even with the slow start to this week, I see plenty more upside in the future.
The Dow’s breakout above 20,000 combined with the charts and solid fourth-quarter earnings season leads me to believe that the underlying uptrend will continue at least into the end of the first quarter. And it still isn’t too late to get in the game, with stocks looking even more attractive on the broader market’s current pullback this week.
Odds are good that the S&P 500 will finish 2017 up near historical averages, possibly in the 7%-9% area. Each and every bout of weakness will be scrutinized by the mass media as the “beginning of the correction,” but the smartest investors will simply ignore the noise and use those pullbacks as strong buying opportunities.