5 reasons why stocks are in melt-up mode
All four major stock indexes hit record highs Thursday
Wall Street is melting — up! Market meltdowns get more attention, but the U.S. stock market is ripping higher and breaking records yet again.
All four major U.S. stock indexes broke out to fresh record highs Thursday, a day after stocks posted their biggest gains since the presidential election. Wall Street’s post-election rally has shifted into year-end rally mode.
The blue chip Dow Jones industrial average (which is up more than 1,400 points since Election Day and is up 12.6% this year), the large-company Standard & Poor’s 500, the tech-stock packed Nasdaq and small-company Russell 2000 all hit new highs at the same time Thursday, a rare event that happened in November for the first time since New Year’s Eve in 1999.
Call it a moonshot. Call it Wall Street euphoria. Or call it a “Trump rally.”
Whatever you call it, the market melt-up is real. Here are five theories that explain why stocks are in rally mode.
1. MONEY MANAGERS PLAYING CATCH-UP. 2016 is almost over, and stock fund managers that are trailing the benchmarks they’re measured against have to jump in and buy stocks or get left further behind in the performance race, says Brad McMillan, chief investment officer at Commonwealth Financial Network.
2. BOND SELL-OFF EASES.
The big sell-off in U.S. government bonds, which had pushed the yield on the 10-year Treasury note up more than a full percentage point from a low of 1.32% in July to nearly 2.5% at the start of December, has stalled. Thursday, the 10-year note was trading at 2.41%, reducing fears that a massive spike in borrowing costs would put added pressure on a stock market most market pros say is overvalued.
3. CASH FLOODING BACK TO STOCKS. “Tons of cash on the sidelines is coming off,” says Gary Kaltbaum, president of Kaltbaum Capital Management, adding that December historically is a bullish month. Money that had been invested in bonds is moving back to stocks in search of bigger returns, adds Ann Milletti, senior portfolio manager at Wells Capital Management.
Cash exiting bond funds in the most recent five-week period hit a 31⁄2- year high, according to Bank of America, while stock funds enjoyed their biggest fourweek inflows in two years.
4. “TRUMP EFFECT.” The market is still driven by momentum inspired by Trump’s business-friendly policies, says David Kelly, chief global strategist at J.P. Morgan Funds. Investors are pricing in better corporate earnings if Trump’s promise to lower the corporate tax rate to 15% or 20%, from 35%, occurs, he says.
5. A TREND SIGNAL SAYS “BUY.” The Dow Jones Transportation Average, which is filled with stocks such as package delivery companies UPS and Fed Ex as well as railroads and airlines, reached a fresh high Wednesday for the first time in two years and hit new highs again Thursday.
The “Dow Theory” says the market uptrend is “confirmed” when stocks in the Dow that make stuff, such as Coca-Cola and Apple, and stocks in the Dow Transportation Average that ship stuff hit record highs at the same time, says Bruce Bittles, chief investment strategist at Baird.