Stocks enter holiday weekend under all-time highs, but why?

Stocks enter holiday weekend under all-time highs, but why?

The week ended with positive bank earnings, glowing comments from Janet Yellen, and a rally in crude oil following a Saudi commitment to further cut output, with a new administration about to take office next week. Sometimes markets rally on such good news, especially before a three-day weekend. But stocks today remained below all-time highs. 

Traders like their holiday weekends. In the past, when more trading was done live on trading floors, traders would sometimes rally the stock market up, take profits, then quit to go enjoy a nice lunch and start to the holiday. 

There aren't so many traders on the floors these days, either here in Chicago at the Board of Trade or at the NYSE, but the pattern of Friday's "Run 'n Fun" persists. This morning, the S&P 500 rallied to just shy of its January 6 record. But with the earlier slide into Thursday, the stock market ended up flat for the week. 

When the news is so upbeat, why didn't US stocks manage better than a break-even finish before a holiday? Why not rally a little further, just so investors and fund managers can have something to celebrate on their day off? 

The news is the kind that, typically, is especially encouraging to investors, more than to economists. Bank of America reported a 43% rise in profit. JPMorgan surprised by beating expectations on profits, and even troubled Wells Fargo reported net profits. Financial sector stocks did rise, but not dramatically. BofA rose just 0.1 percent. 

Fed Chair Janet Yellen, speaking at a town hall meeting with teachers, said in no uncertain terms that "short term I would say I don't think there are serious obstacles. I see the economy as doing quite well." With the longest streak of job creation in US history, low unemployment, and steadily rising inflation, she had good reason for her view. So why didn't stocks rally? 

Safe havens like gold and Treasury bills and bonds all saw continued increases, as investors diversified. While the new administration hasn't yet taken office or laid out specific plans other than repealing Obamacare, many analysts and investors have said that they expect a business-friendly regime, with significant deregulation and tax cuts for corporations, combined with significant government spending on infrastructure. 

While some foreign observers, like Europe's largest money manager, Amundi SA, are doubtful that the US will begin much fiscal stimulus in the coming year, US equity markets have rallied largely on that expectation. The Congress's budget reconciliation report calls for a 2017 budget deficit of over half a trillion dollars to pay for tax cuts and fiscal stimulus, with deficits growing to over a trillion in 2027. Nevertheless, some investors remain skeptical that all of that spending will actually materialize. 

That may be the reason for this failure to rally to new highs on all this good news. Or the markets may simply be waiting until the new president takes the oath of office to take off. The day after the election saw a $3 trillion rise in global equities. The day after inauguration might see a similar bullish celebration.

Or it might not. The truth is, there's no way to predict because there is no simple formula for what triggers rallies. If there were, it would probably be record employment, well-managed inflation, boffo bank earnings, and rosy comments from the usually-reserved Fed chair. But all that happened in the past week and the market still said, "That's great, let's not get too carried away just yet." 

Or the stock market may have decided to rest up over the three-day weekend (it's Martin Luther King Day in the US) before welcoming the incoming president with some record stock highs. Despite all the insightful analysis of the various factors at work, the only honest conclusion right now is, nobody knows what will happen next week. But we do know it will be filled with trading opportunities.

Enjoy your long weekend. And perhaps enjoy a look back at Dr. King's inspiring "I Have a Dream" speech from August, 1963.


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