This Rally is Far From Over
November 17, 2017
The market yesterday answered whispers of doubt and concern that perhaps the rally was over – or at least ready to yield to a 5% pullback or 10% correction. It’s true those moves can happen. However, the fundamental building blocks of the rally are actually only getting stronger.
There is no doubt that a part of Thursday’s session was the result of Wall Street applauding House Republicans for getting the job done and passing its version of tax reform. Now the baton is handed off to the Senate.
Investors and would-be investors must understand that economic trends are improving, and they continue to justify this market going a lot higher from where it is today.
In addition to an impressive and encouraging housing and industrial production numbers, capacity utilization figures came in above Wall Street consensus as well, reflecting economic momentum.
I continue to say that the wheels of the economy are moving. While lower taxes would give it a boost, I don’t think a failure on that front would derail the economy or the market beyond a brief pullback.
Of course, we want to see tax reform happen for the tide of prosperity to rise higher and wider.
By the way, there is another factor that explains why stocks have been moving up and down: corporate earnings. The action in Washington, D.C., has dominated the market of late, masking what has been the second quarter in a row of great results. And once again after the bell last night, several companies from various industries released their reports, most of which included strong revenue and earnings growth.
The retail group has caught my eye, particularly the brick-and-mortar stocks, which are rocking right now. Earlier this week, the retail sales report saw surprising strength in sporting goods companies. Foot Locker (FL) is up huge on earnings this morning — it’s up more than 30% this week — and by no means is it the only retail winner.
Other brick-and-mortar grand slams today — aided by massive short positions — include:
- The Gap (GPS): 10% short
- Shoe Carnival (SCVL): 12% short
- Abercrombie & Fitch (ANF): 23% short
- Hibbett Sports (HIBB): 20% short
- The Buckle (BKE): 23% short
I think brick and mortar is still a proxy of sorts for Main Street even as more and more people shop online. The only loser in the space today is Williams-Sonoma (WSM), which caters to rich folks. The company beat on revenue and comparable-store sales and reported in-line earnings, but weak guidance has the shares much lower.
The bottom line is this: I see the market as poised for a huge but selective rally if Republicans can deliver on tax reform. I think a bill gets done, even though the final product may not be what was promised. Plus, I love the fundamental underpinnings of the economy right now, and I expect it to lead to higher earnings and stock prices.