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Stocks close higher but Dow fails to crack 20,000

The difference between successful people and really successful people is that really successful people say no to almost everything. – Warren Buffett

While the Dow Jones Industrial Average came close to eclipsing the 20,000 mark last Tuesday, it ultimately fell short in quiet trading and ended the week at 19,933, a gain of about 90 points. Not even a terrorist attack in Germany or geopolitical tensions abroad could reverse the Dow’s upward climb. Good things usually come to those who wait and, in this case, it probably is just a matter of time before the Dow reaches this milestone and closes above it. The moment could actually come this week as the last week of the year has usually been a good one for stocks. Since 1928, the last week of the year has produced an average gain of over 1% for the S&P 500 Index, an increase that if duplicated by the Dow, would put this benchmark comfortably over the 20,000 mark. But round numbers such as this can prove to be a psychological hurdle for investors and this number has proven to be no exception. Stocks are due for a breather as the Dow has risen more than 10% since the end of October as investors have adopted a positive view of president-elect Donald Trump’s pro-growth economic policies. For the most part, last week’s economic news lent support for this optimism as U.S. GDP growth in the third quarter was revised higher to 3.5% from 3.2% as consumer spending was particularly strong. Orders for so-called core capital goods, a key measure of business investment, were also strong in November. In a speech on Monday, Fed Chair Janet Yellen added that the U.S. has had the strongest job market in almost a decade due to improving wage growth and few layoffs. Recent positive economic data like this coupled with the potentially favorable impact of Trump’s policies have caused the stock market to surge higher. With the market due for a pause, it is likely that recent gains will be consolidated over the near-term, although the path of least resistance seems higher.

Last Week

In other economic news last week, U.S. existing home sales in November were better than expected as buyers flooded the market to lock in low interest rates before they possibly headed higher. The pace of sales was the highest since February 2007. New home sales in November were also better than expected and hit the highest level in four months. Although durable goods orders fell almost 5% in November, they were in line with estimates and excluding the volatile transportation sector, they actually rose modestly. The December University of Michigan consumer sentiment index was 98.2, higher than expected and one of the highest readings in recent memory. Finally, weekly jobless claims rose but remained below 300,000, a sign that the labor market remains strong.

For the week, the Dow Jones Industrial Average gained 0.5% to close at 19,933 while the S&P 500 Index rose 0.3% to close at 2,263. The Nasdaq Composite Index added 0.5% to close at 5,462.

This Week

Another consumer confidence survey for December should be encouraging and higher than the previous month as consumers remain optimistic about the prospects for the U.S. economy. November pending home sales are also expected to be fairly strong as home buyers act before interest rates move higher. The Chicago Purchasing Managers Index (PMI) for December should be on a par with last month’s reading and confirm an expanding manufacturing sector.

The U.S. bond market closes early on Friday in anticipation of New Year’s Eve while the stock market will observe its normal trading hours on that day. In a rarity, there are no corporate earnings reports scheduled for this week.

Portfolio Strategy

The stock market’s surge since the election has been powerful, but there are a number of different events that could increase volatility and be negative for stocks. The strong move upward in stocks has been based on hope but failure of both president-elect Trump and a Republican-controlled Congress to implement his pro-growth policies in a timely manner could have adverse consequences. Consumer confidence and sentiment can also be fickle and change quickly, with hope replaced by fear if stocks lose momentum. Fourth quarter earnings reports will be released in January and disappointing results and lackluster forward guidance by companies could be problematic for stocks. Another potential land mine for the stock market is rising interest rates and higher inflation as bonds would become more attractive than stocks based on their higher yields, thereby giving competition to stocks. Similarly, a stronger dollar could also make it more difficult for multi-national companies to do business overseas and result in lower profits and lower stock prices. While the price of oil has recovered from its lows earlier in the year based on tacit agreements among OPEC and non-OPEC countries to reduce output, these agreements are difficult to enforce and, in many cases, are not verifiable. In addition to the uncertainty and timeliness of U.S. growth initiatives and government policies, a trade war with China or the rise of populism in France or Germany could be disruptive to the markets. Right now investors are giving president-elect Trump the benefit of the doubt, but that could change if things do not go as planned once he takes the oath of office.