The last time we witnessed a significant correction in the stock market was back at the beginning of 2016 when the S&P 500 index plunged by 11.5% over a six-week period. Since then, equities have taken off to the upside posting new record highs on almost a daily basis.
The memories of fear and uncertainty at the start of 2016 that pushed stocks lower after Chinese growth cooled and the domestic equity market in China suffered devastating losses have faded in the market’s rearview mirror. These days, we have come to expect new highs in stocks every day and for good reasons.
The Fed upgraded economic growth in the U.S. from “moderate” to “solid” in late 2017. A business-friendly administration in has cut regulations dramatically and pushed through a huge corporate tax cut late last year. The anticipation of lower taxes and fewer regulations spurred gains throughout 2017, and the reality of the Administration’s success has kept the bullish party going.
Recently, nothing has been able to stand in the way of the ascent of the stock market in the U.S. and around the world. Equities ignored the threat of a government shutdown a few weeks ago. North Korea, Iran, the Middle East, and other hot spots have not resulted in any corrections. The prospects for higher interest rates and even more than three rate hikes in 2018 has done little to deter the flow of capital into stocks.
Stocks have had bullish blinders on and the higher they go, the greater the risk of a correction. When asset prices rise too far, the laws of gravity tend to make the eventual reaction ugly.
A two-year anniversary for the raging bull
We are coming up on the two-year anniversary of the bull market in equities that have taken the major indices to record after record levels. At the lows in mid-February 2016, the DJIA was at 15,503.01 level. On January 22, 2017, the index made its most recent high at 26,616.71, an increase of an incredible 71.7% in just under two years. The bullish stars lined up for equities over the past twenty-four months. A continuation of low interest rates caused capital to flow into the stock market. The election of a “business-friendly” administration in November 2016 kept the bullish party going. At first, fewer regulations on U.S. business caused optimism to increase. The prospects for tax-reform, infrastructure rebuilding and a more level playing field when it comes to international trade resulted in a continuation of gains.
