The Market’s Temperature Rises, Too


After a cool late August and early September, it’s heating up on the East Coast, with daily temperatures in the 80s. And the market has been getting warmer, too.

On Wednesday, the Dow Jones Industrial Average, the S&P 500 and Nasdaq Composite index all hit new all-time highs, and they traded at new intraday highs as I wrote this around noon Friday.

Two key lagging indexes—the Russell 2000 and Dow Jones Transportation index—have been on a tear of late, each gaining 5%  since late August.  Neither has regained its all-time high—and Dow Theory says the Transports would have to do that in order to confirm the DJIA’s own bull market—but they’re getting there.

I’m impressed by the strength of this rally, which is broad-based. It reflects rising confidence in the economy, which has been growing slightly faster this year, albeit well short of the 3% the Trump Administration is targeting.

It also shows investors’ weariness of the continuing stand-off with North Korea over its missile program; their belief the Federal Reserve may not raise interest rates for the rest of 2017, and their growing confidence that Congress will be able to pass some market-friendly form of tax reform.

To which I say: not so fast.

First, it’s easy for Americans to dismiss the danger of North Korean leader Kim Jong Un, because we’re thousands of miles away and his missiles can’t reach us—yet. But try telling that to the people of South Korea and Japan, whose air space North Korean missiles have violated twice.

These two countries are absolutely vital to the global economy, and an outbreak of any kind of conflict in that region would send all stock markets plummeting.

Second, don’t count out another rate hike by the Fed, unless Chairwoman Janet Yellen holds off to secure her reappointment. (Real estate developer President Trump likes low rates. )  Inflation is quietly picking up, especially housing costs which are rising at the fastest clip since 2005. That may be why traders give a December rate hike a 50/50 chance.

Finally,  the president and Democratic leaders Chuck Schumer and Nancy Pelois may have cooked up a short-term extension of the debt ceiling, but that doesn’t mean Washington is working again. Tax reform will be a long, tough, nasty slog, because real money is involved for some very powerful interest groups.

A couple of weeks ago, we suggested reducing risk a little. This is why we don’t go “all in” on any market forecast: If stocks go down, you limit your losses. If they rise, you participate in the up side.

Right now, I think investors are too optimistic and blithely ignoring risk.  But if they continue to drive stocks higher, I’ll enjoy the profits while knowing I’m protected if things start going the other way.