Is this as good as it gets?
That’s an important question today as the Dow Jones Industrial Average closes up 1.54% to 30,045.84, the first close above 30,000 ever.
Other indexes were just as strong. The Standard & Poor’s 500 gained 1.62% by the close. The NASDAQ Composite was up 1.31% and the NASDAQ 100 was ahead 1.46% at the end of the session. The Russell 2000 small cap index ended the day ahead 1.78%.
It’s not hard to see why stocks and investors are so ebullient: There’s just so much good news.
The election is, finally, over and the Constitution still stands, if a little tattered, and the odds of political violence have certainly receded (if not totally disappeared.) The Biden victory promises an administration of predictability and a return to traditional norms. It remains to be seem if “a return to normal” is enough to handle problems such as the distribution of a coronavirus vaccine, a recovery of an economy that is looking wobblier every day as more and more of the economy shuts down in a so far unsuccessful effort to slow the spread of the coronavirus, creating a politically viable strategy to combat global warming, systemic racism, voter suppression…. I could go on but you can fill out this list just as well as I can. But Wall Street loves predictability and the return of familiar figures such as former Fed chair Janet Yellen as Treasury Secretary is profoundly reassuring to Big Money.
Sure, the coronavirus is raging out of control–the United States saw 179,067 new cases on November 23, a 14-day increase of 49%, and 1,032 deaths, a 62% increase over the last 14 days–but we’ve now got three likely coronavirus vaccines headed to the U.S. Food & Drug Administration in December. And the financial markets are convinced that this mean a return to normal for the economy in the first half of 2021. Against that conviction, bad news in December about cancelled cruises or stumbling retail sales, isn’t likely to cause a market pull back as we race to the end of 2020.
The Federal Reserve promises current low interest rates forever and ever with some Fed members now pointing to the current extraordinarily low rates lasting into 2024. Even the prospects that Congress won’t pass a coronavirus stimulus bill soon enough or big enough to cope with the economy’s problems doesn’t seem to engender much worry. The Fed will have the economy’s and the market’s back. The level of trust in the Fed is touching but it seems unshakable.
And, maybe most importantly in this list of “good things” is the conviction that the U.S. economy will rebound in 2021. That’s why the Dow, where the 30 stocks in the index include a high percentage of coronavirus recovery stocks–Boeing, American Express, Caterpillar, Coca-Cola, Visa, Walmart, McDonald’s, Dow, Disney, and Chevron among them–has been moving up so strongly on vaccine news.
I don’t think that all of this good news is yet priced in. And there’s a considerable amount of upward momentum now built into this rally.
And I don’t think you should ignore the continued capitulation by the few remaining shorts as the rally continues. When a short-seller decides the pain is too great and he or she decides to close a short position, he or she has to buy shares to cover that short.
So I’m not looking for this rally to fall off a cliff before the end of the year. Which means that it is much stronger than I anticipated just a few weeks ago. And that I’ll be doing my own re-evaluation of my own shorts and puts.
But I still have to ask, I this as good as it gets?
If all the good news isn’t quite priced in yet, it is very certain that almost none of the potential bad news is priced in. How about difficulties in getting these vaccines into peoples’ arms? How about lasting damage to the economy that will make the recovery “to back to normal” more stretched out than it now seems? How about the likelihood of a resumption of partisan warfare in Congress as soon as there is a new Congress in January?
I still think some insurance against those negatives is in order. I’m just not sure right now about paying the price for that insurance.
P.S. For those of you musically inclined, may I suggest The Strokes “Is This It” as the theme song for this market.
