We have a bull market again. Don’t you love it?
Since the election on November 8th the Dow is up almost 10%. In fact, all the major market indexes (Dow, S&P 500, NASDAQ) are at all time historic highs. This has been one of the strongest post election rallies ever. And markets look like they want to keep going.
Is this for real?
Technically, markets are moving higher on the anticipation of pro business economic stimulus in the form of corporate tax reform, tax cuts, regulation rollback, repatriation and other things. The idea is to unleash the US economy by removing the restrictive policies holding it back. A stronger economy means higher corporate earnings and higher stock prices.
That is the economic underpinning behind the rising market. Of course, markets, especially in the short term, are only partially driven by economics. The dominant factor is emotion guided by confidence in the future. It is this crucial element of investor psyche that has changed dramatically and is the primary force driving this market higher.
Since the market bottom in 2009, the major indexes have risen over 200%, not too bad. But the market rose into strong headwinds of slow growth and more importantly a sour narrative. Even the most ardent investors I know believed we were in an environment of slow growth, “new normal” for now and ultimate disaster later.
The consensus investor attitude seemed to be that in a near zero interest rate environment the stock market was the only place to earn a decent return. Investors would dabble in market out of necessity for now while the Fed was artificially propping it up with low rates and easy money, but always with an eye toward getting out of Dodge before the market resumed its rightful place, Hell in a hand basket. They would gather their rosebuds now and get out before the other shoe dropped from the financial crisis.
That miserable, sour narrative is being replaced with a much better one.
The last time pro growth policies of this magnitude were enacted was during the Reagan administration in 1981. The policies induced a level of economic growth not seen and many decades and ignited a bull market that propelled the Dow Jones from under 800 in 1982 to 11,500 over the next 17 years, a gain of over 1300%.
Most investors invest because they have faith in the future. The future just went from inevitable financial Armageddon to that of the possibility of another boom time like the 80s and 90s. Such a transformation of expectations makes a huge difference in investor behavior, just like you would treat life differently if you went from thinking you were going to die in a couple of years the believing you’ll live another 30 or 40 years.
The other shoe may still drop from the financial crisis. But the market is coming to realize that other shoe won’t be a worse financial crisis, but rather the other 300% or 400% move higher that was left on the table.
Tom Hutchinson is a Wall Street veteran with extensive investing and finance experience.
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