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The stock market’s pause is an invitation

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Investors shouldn’t be surprised that the recently invigorated stock market has pulled back some in recent days, frustrating the drive to pierce the just-out-of-reach 20,000 level for the Dow Jones industrials. Many market analysts regard the stall as a pause that should refresh the robust advance since the Nov. 8 election that catapulted Donald Trump to the presidency.

Their take: It’s an opportunity for those who have yet to participate in this unprecedented climb, another chance for the institutional market pros as well as intrepid individuals to load up on stocks at lower prices. As to the Dow’s flirting with the 20,000 mark, it seems sure to hit to that magic number before long.

“We are reminded that millennium and century marks on major stock indices have traditionally acted like rusty doors, requiring several attempts before finally swinging open,” observed Sam Stovall, chief investment strategist at CFRA (formerly S&P Global Market Intelligence), in his latest note to clients. “We think it should be just a pause in the market’s advance, as the S&P 500 is up 6.3 percent from the July 11 post-correction recovery high, compared with the average gain of 9.5 percent after getting back to break-even from corrections since 1945,” Stovall added.

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So analysts believe stocks have more upside ahead. But that doesn’t mean there’s room for complacency. The big issue for the market is for corporate earnings growth to keep supporting further advances. And equally important is the paramount question: What exactly will be the next president’s policies on economic growth and taxes? So far, the market appears inclined to believe that President-elect Trump’s policies will be good for both the economy and the stock market.

“We responded to Trump’s election by raising our forecast for 2017’s real GDP growth from 3 percent to 3.5 percent,” said Ed Yardeni, president of Yardeni Research in a note about market strategy next year. His “favorite and most likely scenario for 2017: The S&P 500 would rise to 2400-2500 as corporate and individual tax cuts boost corporate earnings.”

The rallying markets “reflect a potent combination of increasing pro-growth sentiment, improving economic fundamentals and positive earnings revisions and extremely negative positioning,” said Lisa Shalett, chief of investment and portfolio strategies at Morgan Stanley Wealth Management. Given technical factors and market seasonality, she expects the huge portfolio rebalancing behind the rally “could last until Inauguration Day and thus can be bought.”

But Shalett argued against investors getting comfortable and overestimating “the extent to which policy changes will impact  earnings next year.” So she advises “adding geographic diversification” and possibly add “active exposure to Japan and the emerging market and selective value exposure in Europe.”

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Still, investors seemed determined to cheer the market’s rally largely based on expectations that Mr. Trump’s policies will greatly work in favor of economic growth. “The Street is betting that taxes will be reduced, regulations lifted and big money spent starting sometime next year, and there’s little that can be said to change its mind,” said George Brooks, editor of Investor’s First Read newsletter.

The perception is that big things are going to happen, he pointed out, and that no one is going to be left behind. ”Institutions must get on board, or miss out,” is how he describes the current investor mood. Brooks expects contrarians will insist on going against the market at some point in the rally, but he argued that “there isn’t any tangible information now to say that all, or a lot of [Mr. Trump’s] goals won’t be achieved.”

But he believes stocks are on “solid footing without the Trump promises.” Brooks pointed out that the “economy is picking up, and that will prompt the Federal Reserve to raise rates further.”

And he noted that the post-election surge has overrun the classic year-end rally -- the usual mishmash of selling and buying driven by unloading losers for tax purposes and a scramble by institutions to dress up portfolios with winners. Indeed, the traditional year-end rally should enhance the current “Trump rally” as a way of introducing a more positive outlook for the stock market next year.

So investment pros have been searching for quality stocks that are depressed from their year’s highs, mainly because of year-end tax-loss selling strategies. Noted Brooks: “That offers buyers an opportunity to pick up bargains.”