The Good, the Bad, and the Ugly News About the Dow Hitting 26,000 So Fast

Mandeep Rai

Yesterday, the Dow Industrials blew through 26,000. If it seems like it happened in a heartbeat, that’s because it nearly did!

It took 109 days for the Dow to climb from 21,000 to 22,000 … but just seven days to get from 25,000 to 26,000. That made this 1,000-point rally the fastest in Dow history.

Sure, the percentage gains get smaller the higher the Dow goes. But you get the drift – this is a move for the record books. Now, here’s the good, the bad, and the ugly news behind it …

The Good: There’s a definite upward bias in the market, and it’s proving tough for the bears to derail.  We’ve now seen 14 straight months of S&P 500 gains on a total return basis. That’s the first time ever, and we’re on track to add another positive month with January firmly in the green.

What’s more, last year was marked by record low volatility – and this year we’ve seen even less! The reason: Money is pouring into stock mutual funds and ETFs. Those flows are also rooted in powerfully strong fundamentals, like tax reform, rising earnings estimates, stronger GDP growth, bigger wage increases, and lower unemployment.

The Bad: We’re seeing clearer and clearer signs of “Fear of Missing Out” – or FOMO. That’s when investors pile on just because the market is going up, rather than for those fundamental reasons I just mentioned. Sure, that compounds the upside bias in the near term. But it also brings back scary memories of previous mega-moves that didn’t end well (1999-2000 anyone?)

Meanwhile, we’re seeing interest rates continue to rise. They’re not moving very quickly, or in big chunks. But as they climb higher, it will increase the required return that stocks have to throw off in order to keep investors from saying “To heck with it, I’m just going to own Treasuries.” Or in other words, if rates do rise too quickly, some investors will dump stocks and volatility will spike.

The Ugly: Our country’s longer-term risks haven’t gone away. If anything, they’ve gotten worse. Consider the divergence in savings and confidence illustrated in this chart by Piper Jaffray. It shows that consumer savings (the gray line) is dropping even as confidence (the blue line) is surging. That has happened before … around cyclical tops for the market.

Then there’s the risk of soaring consumer debt levels, show in this chart below:

You can see that consumer credit is at an all-time high!  Not only are we Americans saving less, we’re borrowing to fulfill our needs and wants – on a scale that could end very badly. That means when we do see another deleveraging cycle, it could be our biggest and worst yet.

Again, those are longer-term issues – and right now, we can’t overemphasize them because investors are still looking for growth and trying to ride the market to new highs in spite of the perils. But both the “Bad” and “Ugly” warning signs I mentioned earlier should be in the back of your mind as potential problems down the road.

In the meantime, one way to profit from potential ongoing upside … while also giving yourself some insurance against downside risks … is to focus on the “best of the best” stocks. I’m talking about stronger companies that trade at lower valuations, and that have rock-solid Weiss Ratings.

To help you find some potential candidates, I looked at all the S&P 500 components that received our best Weiss Ratings. Then I narrowed that list down to show only companies which have trailing and forward PE values at or lower than the market average. Here’s the resulting list of the 25 highest-rated names:If you’re a bull – but an increasingly cautious one – these could make good investments to add to your portfolio.

 

Best wishes,

Mandeep

Mandeep Rai has more than 15 years of investing experience, working as both a stock and credit analyst. At Weiss Ratings, he researches and evaluates financial and economic themes, and makes decisions on when to buy or sell specific shares for the Top Stocks Under $10 and Weiss Ratings’ Quantum Trader portfolios.