AAII Home AAII Blog

Market Rally Gains Momentum, Reaching Rarified Air

Friday marked the one-month anniversary since Hillary Clinton conceded the presidential election to Donald Trump. Since the close on November 8, Election Day, the majority of U.S. stocks has seen a strong gain. This week, though, the “Trump Bump” seemingly found a higher gear. On Wednesday, several of the major U.S. indexes posted their biggest one-day rallies since the election. The Dow Jones industrial average, S&P 500 index and NASDAQ Composite all gained more than 1%.

Then, on Thursday, something happened that has not occurred in 18 years: The Dow Jones industrial average, the S&P 500 index, the NASDAQ Composite Index, the Dow Jones transportation average and the Russell 2000 index all closed at new all-time highs. The last time this happened, according to MarketWatch, was March 16, 1998. The new high in the transportation index may portend strength in the overall economy because it includes train, truck and shipping companies that carry the raw materials and goods used in manufacturing and construction. In addition, Thursday marked the 13th record finish for the Dow industrials since the election.

Since the election, equities, for the most part, have been on a sharp ascent on the belief that President-elect Trump will implement pro-business policies that will boost the economy. Since the close on November 8, through the close on Friday, December 9, the iShares Dow Jones U.S. Index Fund (IYY) has climbed 6.5%. Over that same period, eight of the 10 S&P Select SPDR ETFs have posted gains.

Although equity prices have been on the rise over the last month, volatility in the market has fallen. The CBOE Volatility Index (VIX) has fallen 37.3% from the close on November 8 through the close on Friday, December 9. Some analysts worry that this is a sign that investors are becoming complacent and are being set up for a market pullback.

One of the two sectors to be down since the election is health care (with Consumer Staples (XLP) being the other). Although it is up 0.7% since November 8, the health care sector has lagged the overall market. This week, health care issues slid after President-elect Trump threatened to cut drug prices. “I’m going to bring down drug prices,” Trump told Time in his “Person of the Year” cover story. The Health Care Select Sector ETF (XLV) was up 0.6% this week, while the iShares Nasdaq Biotechnology ETF (IBB) fell 0.3%. Within the SSR tracking portfolio, Omnicell, Inc. (Group 3: OMCL), a producer of automated medication management systems for hospitals, was the weakest performer this week, losing 5.6%, while the portfolio gained 3.6%. The movement of health care and biotech stocks in contrast to the broader market over the last several weeks highlights the need for a well-diversified stock portfolio, which is what the Stock Superstars Report strives to do by diversifying not only across sectors and industries but by investment style as well.

Looking ahead to next week, the Federal Open Market Committee (FOMC)—the branch of the Federal Reserve Board that determines the direction of monetary policy—will meet. Almost everyone assumes that the FOMC will raise short-term interest rates. According to the CME Group’s FedWatch, there is a 97.2% probability of rates going up next week, as of Friday’s close.

Earnings Season Update

This week, the last three companies in the SSR tracking portfolio reported their earnings for the third calendar quarter: Cantel Medical Corp. (Group 1: CMD), Photronics Inc. (Group 3: PLAB) and Toll Brothers Inc. (Group 3: TOL). All three companies beat their respective consensus earnings estimate, and you will find more information on their quarterly results in the news section below. Looking at the earnings results for the SSR tracking portfolio for this past earnings season, we see that only five of the 36 companies fell short of analyst expectations. Another two reported earnings that were in line with the consensus earnings estimate. Overall, the median earnings surprise for this past earnings season for stocks in the SSR tracking portfolio was +4.9%.

Wayne A. Thorp, CFA
Senior Financial Analyst, AAII
SSR Research Committee

Click here for news on the current SSR holdings and weekly performance data.

The Stock Superstars Report (SSR) was developed to educate individual investors on how to build a diversified, risk-minimzed stock portfolio using a mix of strategies. The SSR is designed to provide all the information you need to manage a stock portfolio as well as to teach you about timely investment principles relating to the SSR portfolio and stock investing in general.

 

Leave a Reply

Your email address will not be published. Required fields are marked *