By Mott Capital
Stock Market’s have been moving aggressively higher since the Presidental election, with the Dow Jones Industrial Average (DIA) closing in on 20,000, the S&P 500 (SPY) crossing 2,250 and NASDAQ composite sitting at over 5,400. It certainly feels like after the initial euphoria of pro-growth Fiscal policy coming to the US economy; the recent stock market rally has turned into something more. The EurekaHedge Hedge Fund Index show a return of for the group of about 3.50% as of November 30th, compared to the S&P 500 Total Return Index near return of 10%. It feels as though it has turned into a real chase for performance.
Adding fuel to the recent stock market fire seems like a pure lack of liquidity in the stock markets, with a rotation from fixed income flowing into the stock markets. Since the election, on November 8th 10-year US Treasury yields have surged from nearly 1.85% to 2.60% as of December 16th, while the iShares Barclays 20+ Yr Treasury Bond ETF (TLT) has fallen $130.09 to $117.14, a decline of almost 10%, over the same time.
Meanwhile, it would seem small caps have performed extremely well during this post-election run. The iShares Russell 2000 Growth Index (ETF) (IWO) has rallied from a level of $140.14 on November 8th to $155.83 on the close of December 16th, a gain of over 11%. Small caps tend to be the most sensitive to impacts in the economy with deregulation and tax reform helping those companies perform. Meanwhile, the higher growth, higher beta component to this group has helped with the performance.
One needs to remember that the stock market never goes up in a straight line and that a pullback is likely coming at some point in 2017. It doesn’t seem out of the realm of possibility to see a minor 2-4% pull back once we turn the calendar to 2017. The first six weeks of the year could be vulnerable.