Dow 26K: Is This One Different?

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jan 17, 2018 2:12:07 PM

and tagged In the News

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Dow 26KWith the Dow opening above 26,000 yesterday morning, I was all set to continue down the same path of my Dow 24K and Dow 25K posts. Alas, it wasn’t to be. Although markets are up, the Dow is below the magic number as I write this, which is certainly okay. It would not be a bad thing to take a little longer to hit another milestone, as I noted in those previous posts. But what was really interesting about yesterday was not that the milestone was cracked. Rather, it was that sentiment changed and pulled it down again. Past breaks, on the other hand, have driven the market higher. Is this one different?

Is the bull market fading?

In conjunction with this sudden possible failure of confidence in the stock market, we have a major pullback in bitcoin. As I write this, it is below $10,000 and down almost 50 percent from a month ago. While this is still almost double its value from three months ago, the change in trend in the past month is remarkable. The chatter is that this is normal for bitcoin—and normal for January. We will see.

What we also know is that interest rates have risen over the past month and are moving close to a one-year high. Rising rates are typically considered bad for stocks; for bitcoin, we really don’t know. Still, it is interesting to see this as one more piece of a trend that extends across several asset classes.

The trend I am referring to is that bullishness may be fading. It’s way too early to call the bull market dead. Bitcoin and the stock market may well head higher. In fact, this kind of a pause could be considered healthy, as investors stop, reassess, and then—having thought it through—move back in. At the same time, we haven’t seen this conjunction of circumstances in quite some time.

Is this healthy?

My own opinion is that this is probably healthy for markets—“the pause that refreshes,” to coin a phrase. We know what creates a sustained downturn, and none of those pieces is in place. With the economy growing at a healthy rate, with corporate earnings rising, and with the Fed still stimulating, there is simply no trigger for a pullback. Even if we did get a pullback, as we did in early 2016, it would be unlikely to last, and for the same reasons.

Despite the favorable macro factors, it is still worth keeping an eye on how sentiment evolves. The fact that the market is not charging through Dow 26K, at least not yet, may mean we are not quite at the blow-off stage after all. That would be good news for the immediate future.

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