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Is the Stock Market Rally Sustainable?

Investors profit when they get in early for a broad based stock market rally. The unexpected election of Trump as president first occasioned a selloff and then a rally as investors anticipate stimulus spending, tax cuts and repatriation of offshore corporate assets. But is the stock market rally sustainable and just how broad based is it? CNBC points out that just three stocks are responsible for more than 50% of the last month of run up in the market.

The Dow Jones Industrial average has gained about 1,200 points over the past month. And interestingly, nearly half of that advance has been produced by just three stocks.

Leading the field by a wide margin is Goldman Sachs: That stock’s 26.5 percent rally over the past month has added about 320 points to the Dow. In second place is UnitedHealth, which is up about 15.7 percent, and has consequently tacked about 150 points onto the 30-stock index. Finally, Caterpillar’s 17.3 percent run had added about 95 points, just ahead of JPMorgan’s 90-odd point contribution.

As it happens, these four stocks, including JPMorgan, are the best performers over the past month. But their contributions could be seen as oversized due to their high share prices.

Compared to the Dow, the S&P 500 is up a third as much as it is market-cap weighted. Either way the market is up but is the stock market rally sustainable? Stocks rise on expectation of profits and fall on expectation of loss or simply the end of new profits. For the rally to continue we may need to wait to see what happens after Trump and the new Republican controlled congress takes over in January. At least for investors the picture of what Trump wants to do is becoming clearer. On the other hand it is not clear if he will find willing helpers in congress. The same herd of cats that stymied Obama may be tough for “the Donald” to deal with.

Global Stock Market Dominance

The Wall Street Journal notes that with the recent rally U.S. stock market cap is $25.2 Trillion which is 40% of global stock value. Will this global dominance of U.S. stocks continue or will the rally peter out?

American equities are getting more valuable relative to the rest of the world as major indexes notched fresh records in the weeks after Donald Trump was elected president on Nov. 8. Investors and traders have largely interpreted the president-elect’s policy priorities as likely to benefit U.S. businesses, particularly his plans to cut corporate taxes and increase fiscal stimulus. Also, bets on higher economic growth and interest rates have strengthened the dollar.

The strength of the U.S. dollar adds to the increase in U.S. stock market cap compared to all other nations. So long as the Fed goes ahead and raises interest rates the dollar will go up. So long as too-high rates or mismanagement by the new Trump team does not mess things up there is a shot at a medium term expansion of the economy and persistent rally. The narrowness of the market gains is, however, a concern and the risk of an ever-expanding national debt as Trump pushes tax cuts could put a nail in the coffin of this or any rally.

Is the Stock Market Rally Sustainable? PPT





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