In the past week, the Dow Jones Industrial Average® (“DJIA®”) has rallied over 600 points. This has been a kind of Teflon market that has persistently defied all the skeptics. Despite a bevy of negative headlines, fears of global conflict and questions over whether tax reform will get passed, stocks keep moving higher. Many investors are wondering when and how it will end.
After more than 25 years as an investment professional, I have seen rallies such as this one come and go. This one will end eventually, too. Will it end with a crash? This is far from our view. To be clear, the KIG view is that we have many years left in this bull-cycle for stocks. Will it end with a spike in volatility and send the news channels scurrying to cover the decline as though it is the “beginning of the end” for stocks? Yes, that you can count on happening.
This rally makes sense to us for several reasons. Most importantly it lines up with our 17-year view of market cycles. The most recent cycle began in 2000 and ended in 2016. That cycle saw stagnant stock returns. Sure, stocks rallied at the end of the cycle but that was following the worst financial crisis since the Great Depression. Despite the strong rally following the Financial Crisis, major stock averages ended 2016 around 50% higher than they were at the beginning of 2000. Not much growth to show for 17 years! Yet, from 1982 until 1999 the DJIA® rallied over 1,100%. The 1982-1999 period is representative of what we expect for the 17-year period we just entered. So, our view over the next decade and beyond is very bullish.
A few more reasons for the rally include the strong economy, low interest rates, global growth and the prospect for tax reform. This last reason explains the most recent part of the rally. We believe tax reform will happen. We expect it to pass before the end of the year and we anticipate further stock gains between now and the end of the year as a result.
Next year is when we expect the rally to run out of steam (for a short time) as investors take profits and concerns over deficits, rising interest rates and slowing growth take center stage. Do not be surprised to read headlines that point to these negative forces coming to bear on stocks. Furthermore, do not believe them.
Investors are pushing their gains into the new year in hopes of using the lower tax rate to pay for them. So, stocks have not been rallying as much due to aggressive buying. Rather, investors have simply not been selling.
The economy will continue to expand at an above-average rate. Interest rates, while rising, will remain accommodative. Energy prices will rise but not so much that growth is throttled but enough to help keep employment robust. Last, but not least, is the positive tone that comes from a full-employment economy. Consumers spend when they are feeling good about the future and, notwithstanding the political barbed wire surrounding D.C., they do feel pretty good.
So, enjoy the “Santa Claus Rally”. Enjoy your family and friends during the holidays and know that KIG has a plan for navigating the markets. We are truly grateful to all our clients for their continued support and trust that they place in us. This is the work we love to do and it would not be possible without our wonderful clients who entrust us with their hard-earned portfolios.
Merry Christmas and Happy Holidays to Everyone
Kessler Investment Group, LLC