For now, "perfection" is in the air on Wall Street

Behind the stock market surge

As US equities continue their vertical ascent, posting a sixth straight weekly gain last week, Wall Street sentiment remains at a high fever. Investors now are encouraged by hopes for action on tax legislation, and they expect President Donald Trump will nominate Fed governor Jerome Powell --a status quo choice -- to replace Janet Yellen and become the next Federal Reserve chairman.

Fiscal policy is revving up.The Fed's monetary policy still relatively easy and likely to remain that way. Corporate profits are high. Unemployment remains extremely low. It's utopia. At least until inflation appears, which it hasn't happened yet. So no reason to worry.

Just look at the action in General Electric (GE) on Friday after it reported sour results: Earnings of 29 cents per share missed estimates by 20 cents despite an 11 percent rise in revenues. The company issued downside forward guidance as well. Of course, GE shares were slammed down 8 percent at the market's open. But the buy-the-dip mentality would not be denied, and investors pushed the stock's price back into the green by the closing bell. 

For now, perfection is in the air: The S&P 500 recorded a new record high every day last week, it has hit a new weekly record for the last six weeks and a record monthly close for the last seven months.


Yet, this is not without some hand wringing as the bull market is already one of the longest and most powerful in history (chart above), bringing forth calls to caution. Barron's recently worried about the rise of computerized investing ("Black Monday 2.0: The Next Machine-Driven Meltdown"), citing a number of recent "flash crashes" as possible early tremors of a larger decline coming.

The Wall Street Journal last week noted a trend of institutional outflows from equities this year as valuations are stretched, geopolitical tensions remain high and the Fed continues to tighten policy. Another WSJ article focused on how a lack of volatility, low volume, no catalysts and a shift toward passive investing are making trades crowded.

But the optimism in the WSJ's "Why, Oh Why, Can't We Have a Decent Stock Bubble?" cited the reasons none of these concerns has mattered so far: A global growth upswing, the rebound in earnings after the oil price decline and still-ample global liquidity that's fueling ongoing corporate buybacks and a "reach for yield" dynamic among investors.

Again, outside of nuclear war with North Korea, the only thing that will change any of this will be a clear and persistent rise in inflation.  

Another factor to keep an eye on -- since Wall Street doesn't seem to care at this point -- is that corporate earnings growth is actually slowing now that the easy comparisons to late 2015 and early 2016 have been lapped. FactSet noted that third-quarter S&P 500 earnings growth stands at just 1.7 percent vs. the 3 percent expected at the end of the quarter and the 7.5 percent expected at the start of the quarter.

This is down from the 10.3 percent growth in this year's second quarter and 14 percent in first quarter -- which represented the first back-to-back quarters of double-digit growth since 2011. Market perfection may turn out to be a fleeting moment.