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What you need to know for 12/11/2017

Markets pass another milestone, as investors remain fearless

Markets pass another milestone, as investors remain fearless

Dow Jones closes above 24,000 for 1st time
Markets pass another milestone, as investors remain fearless
A trader at work on the floor of the New York Stock Exchange on Jan. 4, 2016.
Photographer: Kevin Hagen/The New York Times

One of the longest stock-market booms in history continued its gravity-defying ascent Thursday, with investors cheering the prospect of deep corporate tax cuts and the rollback of government regulations under President Donald Trump.

The Dow Jones industrial average eclipsed yet another milestone, closing Thursday above 24,000 for the first time. And the Standard & Poor’s 500 index logged its 13th straight month of gains, the longest such streak in history.

Stock markets have been going up, more or less without interruption, since March 2009, the end of the acute phase of the global financial crisis. This 8 1/2-year bull market is the second-longest in history, behind only the rally that lasted from 1987 until 2000.

Investors are embracing Trump’s pro-corporate presidency, marked by the promise of lower taxes, the installation of former industry executives in key government agencies, and the repeal or relaxation of rules and regulations that have made it hard for some big businesses to expand without fear of interference from Washington.

Indeed, the view is taking hold that Trump, in so aggressively promoting policies aimed to stoke the economy and financial markets, has unleashed animal spirits — largely absent under President Barack Obama — that are now reflected in ever rising consumer confidence indicators and a willingness to embrace risk in the stock market.

“It comes down to psychology, and the psychology today is that everything is awesome,” said Charlie Bilello, a stock market historian at Pension Partners. “Jobs have grown for 85 straight months, you have growth in corporate earnings, and you have tax cuts.”

This week’s rally was sparked by a smattering of good news. Strong economic signals showed consumer confidence at a nearly 17-year high. Retailers posted promising results as the holiday shopping season kicked into gear. And it wasn’t just the Dow. The Standard & Poor’s 500 was up 0.82 percent Thursday and closed at 2,647.58. The Nasdaq composite finished up 0.73 percent.

More than anything, enthusiasm about life being more pleasant for corporate America is propelling stocks. This week, investors were thrilled by the signs that a normally dysfunctional Washington is coalescing around a tax-cut package that would go straight to the bottom line of businesses and their owners.

Of course, there is no guarantee the tax-cut package will become law. That is a potential tripwire for markets.

“If the tax reform doesn’t get done, I think there will be a pretty sharp correction,” said Bruce Van Saun, chief executive of Citizens Financial Group, one of the largest banking companies in the northeastern United States.

Van Saun said stock markets could plunge as much as 15 percent if the tax cut was derailed in Congress. “I think it’s quite pivotal right now,” he said. “The businessperson has an expectation that this will get done.”

In a year of stock market records, hitting the 24,000 mark is not the most historic. This was the fifth 1,000-point milestone for the Dow this year; it first hit 20,000 on Jan. 25. The latest large round number — surpassed after the Dow jumped 1.3 percent Thursday — arrived barely a month after the previous landmark.

These milestones, of course, are arbitrary. Passing a round number in a particular index isn’t itself significant.

But the ease with which the barrier was cleared highlights the extent to which investors are willing to look past geopolitical uncertainty and pricey stock valuations and bet that the market will keep going up.

“People are assuming this is normal — but it is not,” Bilello said. “The relationship between risk and reward has broken down.”

Is this a bubble that’s about to pop? Investment experts are divided.

Skeptics point to the fact that many stocks, especially in the technology sector, are at historically high levels. Investors, they note, are relying on debt to amplify their returns. And a tulip-style mania has sent the price of the digital currency bitcoin soaring.

But even more investors are bullish. Sure, valuations are high, but in contrast to 2000, when Silicon Valley was littered with companies without business models, today’s tech behemoths — including Facebook and Amazon — are fundamentally sound. And a round of tax cuts could further fatten corporate profits. As for bitcoin, if it crashes, there is no direct reason it should necessarily drag down stocks.

Market participants say one of the distinguishing features of this long run is its ability to keep climbing a “wall of worry.” Investors have suffered numerous frights, such as Britain’s voting to leave the European Union, geopolitical fears in North Korea and political turmoil in Washington, but they have jumped back into the market after each stumble.

Ed Yardeni, an independent stock market strategist, has identified 58 of these small market panics since 2009. This year, he has not seen a single one.

“This is starting to feel like a melt-up,” Yardeni said, describing a feverish state of a bull market when investors discard all fears. “The market has climbed a wall of worry, but now it seems as if there is nothing to worry about.”

That, Yardeni said, is itself something to worry about, because investors are throwing caution to the wind.

According to Bilello, the stock analyst, a typical year will include three or four stock market corrections. In 2017, there have been none. The worst swoon this year was a 3.3 percent fall between March 2 and April 19.

Such a relentless — and smooth — rise in stocks is very unusual.

Several unprecedented factors might be helping the rally, analysts say. For the first time ever, a U.S. president is actively promoting a stock market surge. Trump has tweeted often about the stock market, including eight times this week alone.

A president’s boasting about the market doesn’t mean it should keep going up. But at these high levels, psychology becomes a critical factor that can move stocks higher.

That could mean your brother-in-law praising his portfolio at a cocktail party — or the president of the United States speaking more broadly to his 43 million followers on Twitter.

It doesn’t hurt that there has never been a time when the global economy has been growing so strongly while central banks kept interest rates so low.

Traditionally, bull markets come to an end when, after a sustained period of growth, inflation forces central banks to raise rates.

Now, with inflation stagnant and the lingering anxieties of the 2008 financial crisis fading, investors are not ready to contemplate the end of the party.

For example, the latest missile scare from North Korea, after so many previous flare-ups, barely caused investors to bat an eyelid.

“I used to call my clients fully invested bears,” said Yardeni, the investment strategist. “Now they are giddy bulls — how could they not be?”

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