INSIGHTS

On October 10, 2017

AAM Viewpoints – Market Aging Like Fine Wine

For years Wall Street and Main Street have marveled at the stock market’s ability to withstand a steady barrage of challenging headline news. While stocks have not been immune to reaction to some of these events – such as the European debt crisis, China’s slowing economy and the Ebola virus outbreak – it has routinely managed to recover in short order and rally to record highs within a matter of weeks or months. Today, something equally impressive is occurring: the stock market is not selling off into burgeoning good news on numerous economic fronts, among which growing corporate earnings may be most important. This is a very relevant psychological disposition because it reinforces other formidable technical characteristics that point to substantially higher levels. It presents strong evidence that despite the tremendous gains attained in this bullish cycle, valuations are not dangerously lofty and investors perceive even more substantial economic growth on the horizon.

The same bullish factors that propelled the DJIA (Dow Jones Industrial Average) from the mid/upper teen millennium levels prevail today with no geriatric condition for stocks at these levels yet apparent. This Methuselah-like bull market seems to improve like a fine wine. Bullish cup-and-handle formations continue to regenerate presenting impressive price architecture with few signs of speculative, indiscriminative buying. Also, sector participation is expanding, not contracting as one might expect 15 years into this historic cycle. There has been significantly improving relative strength this year in agriculture, building products, financials and other areas that lagged such core leadership categories as aerospace, consumer discretionary, manufacturing and technology. The relative strength strides in these heretofore laggards have not come at the expense of the defined momentum leaders. The market’s self-policing exercises have addressed price and sentiment excesses regularly and in an orderly manner. This rotation has also served to establish and reinforce DJIA support at incrementally higher levels (now in the mid-21,000 vicinity). It has also acted to bolster the long-term leadership of key industry sectors. For instance, health care which lagged in 2016 after a multi-year run as a top-rung sector leader, has re-established its rein as one of the best performing categories in 2017.

I believe occasional pullbacks are preserving an attractive risk/reward ratio at these record levels while also reducing the need for, or likelihood of, a greater-than-10% retreat. Surely, down-and-dirty episodes like those on May 17 and September 5 can occur at any time, but I believe these sudden-impact downturns corral exuberance effectively and save us the drudgery of a prolonged consolidation.

CRN: 2017-1002-6175R

Opinions in this piece are those of Peroni Portfolio Advisors and are not necessarily that of AAM.